Capital is usually needed to buy, enlarge, or upgrade a dental practice, and such capital may not always be available through personal savings of the practice owners. A loan for a dental practice can help with all these issues and ensure you have funds to purchase or upgrade equipment, repay previous debts, or buy another dental practice.
Dental Practice Loan Types
- SBA loan: The SBA 7(a) and 504 loans are quite popular among dental practice business owners due to their favorable terms, long repayment periods, and lower rates of interest. Additionally, they can be used for buying a dental practice, property, and other primary equipment.
- Bank term loans: Banks still use the classical approach, giving fixed or variable loans. If you have a profitable practice with less risk, you can get a loan for a dental practice with very low interest rates from banks.
- Equipment financing: These loans for dental practices are intended to buy clinical and office furniture, and the purchased item becomes the security; there is a faster approval, and often a 100% financing for new gear.
- Practice acquisition loans: Practice acquisition loans specialize in the funding of practices. They can also bring together working capital and acquisition into one piece, and even allow seller financing as part of the sale.
- Lines of credit: A revolving credit line offers flexibility for short-term working capital, e.g., covering payroll, supplies, or unexpected repairs.
- Alternative and online lenders: These lenders provide quick decisions and flexible credit terms but usually charge higher interest and fees.
Requirements for Funding
The eligibility for a loan for a dental practice largely depends upon lender type and dollar amount; however, most lenders utilize the following qualifying factors:
- Credit rating: Personal credit rating and business credit history are both considered when determining eligibility; therefore, lenders will typically offer better terms to those with higher credit scores (usually above 670).
- Experience: Most lenders like to see at least 1 – 3 years of experience to determine eligibility. However, lenders sometimes consider past experience or projected cash flow when underwriting loans for property (i.e., acquisition loan).
- Revenue and cash flow: Lenders will review monthly revenue, profit margins, and debt service coverage ratio (DSCR) when evaluating an applicant’s ability to repay a loan.
- Down Payment & Equity: Depending on whether a loan is acquired through an SBA or commercial bank, borrowers must provide down payments or owner equity interests; this is especially true if the loan is secured by real property or is being used to buy existing businesses.
- Documentation: Lenders generally require the following types of documentation: recent tax returns, financial statements, bank statements, and business plan & pro forma financial statements for acquisitions.
Interest and Fees
Interest rates charged for the loan for a dental practice are highly variable:
- SBA interest rates are generally the most favorable; around prime plus an agreed margin capped by the SBA.
- Bank loans can offer rates in line with or slightly above SBA interest rates.
- The interest charged by equipment finance or other alternatives is generally higher because of the high risks involved.
- There will be costs such as the origination cost, appraising cost, and possibly a prepayment penalty. It is important to check the APR rather than just the rate on its own.
Repayment Terms
Repayment terms will depend on the purpose for which funds are needed:
- In the case of long-term loans, repayment can be done within 10 or 25 years, and apart from the extended term, this results in reducing the monthly payment.
- For loans on equipment financing, the repayment period will depend on the expected useful life of the equipment (approximately 3-10 years).
- Short-term loans and lines of credit are normally for less than five years.
Repayment terms will depend on the ability to comfortably repay the monthly payments, as well as the desire to minimize total interest payable in the process. The borrower needs to choose either a fixed or adjustable interest rate based on the degree of uncertainty they can tolerate. Fixed interest rates will mean certainty because the amount of the monthly repayment will be known, but they are relatively expensive. Adjustable interest rates will be relatively cheap, but subject to changing interest rates in the market.
Common Uses of Funding
Reasons why dentists owning dental practices may seek a loan for a dental practice will depend on the need, such as:
- Acquiring an existing dental practice, goodwill, and working capital.
- Purchasing real estate or office renovations.
- Expensive investments in new technology, such as CAD/CAM systems, imaging machines, and sterilization machines.
- Renovations of existing dental offices or establishing new dental branches.
- Refinancing debt with high interest to optimize cash flow.
Conclusion
Getting a loan for a dental practice could be just the thing for buying, upgrading, or expanding your business. You should know about the different kinds of loans, see if you qualify for one, consider the real costs involved, and then get a loan from an organization that understands dental practices. The right funding will coordinate the payment period with the needs of the business.