Whether you are a first-time dental practice owner or someone looking to expand, relocate or add an additional location, the options for financing dental practice in a post-COVID economy have never been this extensive.
When it comes to the types of financing available for dental practice purchases, the most common options are conventional banks, Small Business Administration (SBA), and seller financing.
Many borrowers have utilized conventional banks to finance dental practice purchases following the COVID-19 Pandemic. Conventional banks specializing in financing dental practices may provide up to 100% financing. This means a lender may provide the buyer with a loan for the full purchase price.
Buyers will usually borrow additional money for operating capital or to acquire the seller’s accounts receivable. Some lenders offer this as a term loan or a line of credit, or a combination of both.
Throughout the country, Small Business Administration financing in a post-COVID economy is made available through local SBA lending partners. Through these programs, they offer traditional term loan options. These loans are backed by a government guarantee and the terms are typically up to 25 years.
Borrowers are usually required to cover a percentage of the borrowed amount. Depending on the lender’s expertise and their SBA status, dental practice financing in a post-COVID economy can be very fluid. Trust your advisors when choosing a SBA Lender.
Seller financing is where the borrower has a financial obligation to the seller for the amount borrowed. Often seen in a dental practice for sale by owner, this was quite common many years ago when conventional bank financing wasn’t readily available like it is today for most borrowers.
As the United States recovers from the pandemic, seller financing is more commonly used today for space sharing situations, as a first lien position is difficult to obtain for traditional lenders. 
Borrowers too often associate the best deal with the lowest interest rate. Interest rate is important but it isn’t the only factor that a borrower and their advisors should be focused on. Remember, once the contract is signed, you are the one responsible for making the payments, not your advisor.
Terms offered vary from lenders but 10-, 15- and 20-year terms are amongst the most popular selected by borrowers.
With the announcement of student loan forgiveness during the Biden Administration, a longer term might provide better cash flow for the new owner. Before selecting the term, be sure to know what the principal reduction policy and the prepayment penalty is with the loan.
Principal reduction is where a lender provides the borrower the opportunity to reduce the outstanding principal balance by making a payment above and beyond the required monthly contract amount.
Know what the lender’s policy and limitations are prior to signing their documents. Some lenders have no limits, some limit the amount each year and some do not permit any principal reduction.
Prepayment penalties are quite common. A prepayment fee may be applicable if the loan is being prepaid in full during a restrictive period stated in the contract.
The most common prepayment fee is 5% of the borrowed amount in year one and declines by 1% each year with no prepayment penalty after the fifth year. This varies by lender and should be discussed and disclosed prior to executing any loan documents.
Prepayment penalties present less of a concern today for most borrowers and their advisors as today’s interest rates are quite low compared to previous years.
Collateral for most lenders is a first lien position on the business, especially in a post-COVID economy. A personal guarantee of the borrower is also required.
Some non-specialized lenders might limit the loan amount to a percentage of the requested amount. This would require the borrower to inject a percentage of the loan amount from their own personal savings.
An additional household guarantor and the possibility of lien position on the personal residence may also be required. Fees could be a flat amount or a percentage of the approved amount. This varies by lender and their expertise in dental lending.
Dental practice financing continues to evolve as the world adapts to a post-COVID economy. Have a higher chance of securing dental practice financing by creating a realistic business plan. There are many resources available to provide templates and direction. Some lenders require them and may have their own templates.
