If you’re considering purchasing a dental practice or even starting a new one from scratch, you probably know you need a certain amount of money as initial capital. Securing a dental practice loan is one of the most common ways to get it, but you need to pay attention to a few factors before applying for this process. With so many different lenders and loan options available, it can take time to figure out where to start.
That’s why it’s essential to research and work with professionals who can guide you through the process and help you make informed decisions about your financing options. In this guide, we’ll go over everything you need to know to apply for a dental practice loan, from what factors affect loan approval to what documents you’ll need to prepare:
1. Choosing the ideal lender
There are several types of dental practice loans available for dentists, each with its own unique features and benefits. To choose the right one, you must consider the types of expenses you have, the amount of money you need, your current credit score, your location, and of course, the terms, fees, and rates the lender works with.
Also, if you’re starting your own new practice, make sure the loan program is a graduated one to allow you to get up and run before being required to make the payments. Pick a loan that guarantees you have plenty of time to get on your feet before being asked to make a full payment.
It’s also important to ensure you are dealing with a specialty lender who usually lends to doctors and doesn’t consider student debt a bad thing or require any additional assets to get the money. We all know most dental associates will have a fair amount of student debt, and it shouldn’t prevent you from getting a loan.
Some common lenders include institutions like traditional banks, credit unions, government programs and online companies. If you run a small business, you can opt for a loan offered by government entities or credit unions since they provide lower interest rates and more flexible repayment terms.
On the other hand, traditional banks like Bank of America, Wells Fargo, Live Oak Bank, and Bank of Southern California offer fixed interest rates, long repayment terms, and a broad range of financing options, such as equipment financing and working capital loans. Finally, online lenders, such as Fintegra, Kabbage, BlueVine, and others, are a good option for those who want a quick and streamlined application process, resulting in faster funding.
2. Checking if you qualify
Lenders use various methods to analyze borrowers in the loan approval process, but some of the common factors that they consider are:
- Credit score: Your credit score is one of the most critical factors. A high credit score indicates that you are a responsible borrower who is likely to make payments on time.
- Income and debt-to-income ratio: Lenders will want to know how much money you make and how much debt you have in relation to your income. A higher income and a lower debt-to-income ratio can increase your chances of being approved for a dental loan.
- Business plan and financial projections: they will check if you have a well-developed business plan that outlines your strategy and financial projections.
- Experience and qualifications: Your education, training, and past work experience in the dental field might determine whether you have the skills and expertise necessary to run a successful practice.
- Collateral: If you are applying for a secured loan, the value and type of collateral you offer can affect your loan approval. Lenders will want to ensure that the collateral you provide is sufficient to cover the loan in case you default on payments.
- Business credit history: If you already have an established dental practice, your business credit history will also be a factor that lenders consider. They will want to see that you have a good track record of making payments on time and managing your finances responsibly.
In other words, you need to demonstrate you’re a low-risk client. To do so, the most crucial action you can take is to live within your means and save money. Lenders usually prefer borrowers who have at least 5% of the loan amount as available cash. This regulation is logical because nobody wants to run out of funds if an issue arises.
Clients with low risk are characterized by having a solid credit score, a robust business plan (with a commitment to executing it), a team of advisors (such as a CPA, consultant, or attorney with expertise in the dental industry), and a minimum of one year of experience as an associate, with production figures sufficient to support their loan application.
If you’re a start-up, the lenders will try to understand the potential scenario for your practice, including the demographics and demand. A benefit you can have as a start-up is that you have more control over who you hire, the services offered, the hours open, etc. But you must guarantee you’ll pay the bills until your practice is stable. However, if you’re getting a loan for a practice transition, you should have a detailed and solid plan with the seller, a critical item that the bank wants to understand. Lenders will rely on your instant cash flow as a benefit, but you must work to mitigate all the risks in the transition.
3. Getting the right documents & information
Lenders will want to see your financial history and projections, including tax returns, profit, loss, and cash flow statements. Make sure you have all of these documents organized and up-to-date before applying for a loan. Here’s a list of some information you should gather.
- Business plan: A strong and detailed business plan that outlines your dental practice’s goals, operations, and financial projections. It can help you demonstrate you have a solid strategy.
- Personal financial statement: A document that shows your personal assets, liabilities, income, and expenses.
- Tax returns: Personal and business tax returns for the past two to three years.
- Bank statements: Recent bank statements for your personal and business accounts.
- Profit and loss statement: A financial statement that shows your dental practice’s revenue, expenses, and profits or losses.
- Balance sheet: A financial statement that shows your dental practice’s assets, liabilities, and equity.
- Accounts receivable and payable: A report that shows the amounts owed to your dental practice (accounts receivable) and the amounts you owe to vendors (accounts payable).
- Equipment list: A list of the equipment you currently own and the equipment you plan to purchase with the loan.
- Dental license: Proof of your dental license and any other professional licenses or certifications.
- Insurance policies: Copies of your business insurance policies, such as liability insurance and property insurance.
If you’re transitioning, lenders might want to know more information about the existing practice, such as the practice’s history, how many patients it currently serves, what kind of staffing model it has, its financial information, etc. Also, some lenders may require collateral, such as real estate or equipment, to secure the loan. Be prepared to provide information about any assets you are willing to pledge as collateral.
After applying for the loan, it’s important to stay on top of your payments and manage your finances carefully. During the process, use and maintain your credit wisely and don’t max out your borrowing power: stay within reasonable budgets for things like a car and/or a home. Lastly and most importantly, have the right team in place to plan and execute your project. As we mentioned before, a Dental CPA can analyze your situation and help you choose the best loan option.
You can count on our team to guide you in that mission! Schedule your consultation here.
