How To Successfully Apply For Dental Practice Loans

Loan Paperwork

Dental practice loan application 101

There is a common misconception that getting loans for a dental practice is easy. Truth be told, there are ways to increase (or decrease) your chances of being approved for dental business loans that can be done before you even start looking for financing a dental practice purchase or financing a dental practice start-up.

As a dental accounting firm we receive a lot of questions concerning the process of getting a dental practice loan, financing for a dental practice start-up, and for dental practice partnership buy-ins.

While we deal with a few deals every year and could answer quite a few of these questions ourselves, we decided that we should just go straight to the pros for the answers.

We reached out to our connections in the dental banking industry with questions from our readers, clients of Tooth & Coin, and listeners of the Start Your Dental Practice podcast – the responses were fantastic.

loan officer at this office

Meet the experts

We were lucky enough to round up a team of bankers that have decades of combined experience as well as many millions of dollars in loan transactions involving dental practices under their belts.

Here’s who is helping the Tooth & Coin community (along with their bank) with the answers on how to get a dental practice loan for your business: 

  • Matthew Adrian, Bank of America
  • Michael Veader, EastWest Bank
  • Clarke Moore, Evolve Bank & Trust
  • Mike Montgomery, LiveOak Bank
  • Galen Van Otterloo, US Bank
  • Jayson Foley, Wells Fargo

 
This is an all star cast with hundreds of millions of dollars in dental practice loan experience (if not into the billions). We will be updating this page with new insights, so bookmark this page to reference throughout your career. 

Each of our interviewees has graciously offered to discuss these same questions with you one on one or to start your process of applying for any dental practice loans. I recommend reading the guide first so that you understand what makes for a successful dental practice loan application. But here’s an overview of what’s discussed:

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Click here to connect with our interviewees to see just how easy they can make the loan process.

Dental practice loan application 101

Each of our interviewees has graciously offered to discuss these same questions with you one on one or to start your process of applying for any dental practice loans. I recommend reading the guide first so that you understand what makes for a successful dental practice loan application. But here’s an overview of what’s discussed: 

How to impress dental lenders 
Are start-ups riskier than acquisitions?
Common mistakes that delay dental loans
Do student loans affect dental practice loans?
When to start the process
All about funding
SBA loan vs. conventional loan
Advice from the experts
Lenders' regions/states of operation
Who lenders work with
Which loan types lenders provide

WHAT ARE THE MOST IMPORTANT ACTIONS YOUNG DENTISTS (NEW GRADS AND STUDENTS) CAN DO TO SHOW LOW RISK FOR DENTAL LENDERS?

Matthew Adrian – The single most important thing a perspective borrower can do to show low risk to a lender is to live within their means and save as much money as possible. We provide 100% financing for dental start-ups and dental practice acquisition loans (including working capital) but we still would like to see borrowers with at least 5% of the loan amount as liquid cash. This policy makes perfect sense as nobody wants to run out of cash in case there is an issue.

“live within their means and save as much money as possible”

Michael Veader – Above average credit score, good liquidity and relatively low obligations.

Clarke Moore – Some key items young dentists can do is simply pay bills on time, reduce loan balances when possible, avoid credit card debt, and demonstrate the ability to save money.

Mike Montgomery – Low risk clients are those who have good credit, a strong business plan (and the will to implement it), a team in place to advise them (CPA, consultant, attorney that are savvy in the dental industry), and at least one year of experience as an associate with production numbers that can support their loan request.

Mike Montgomery

  1. Use and maintain your credit wisely
        a. Pay all of your bills on time
        b. Pay all of your bills on timeKeep revolving debt usage low (credit cards and lines of credit)  
  2. Do not ‘max’ out your borrowing power
        a. Stay within reasonable budgets for things like a car and/or a home (work with a CPA or financial planner if needed)
  3. Take a balanced approach between building liquid (cash) reserves and long term retirement assets.

Jayson Foley – The doctors need to make sure they have active credit and keep their FICO score as close to or above 725 as possible. This is not our minimum but it is a good place for the doctors to shoot for to get fair rates and unrestricted loan products. Also, make sure they are dealing with a specialty lender who only lends to doctors and doesn’t consider student debt a bad thing or require any assets or other services to get the loan.  Wells Fargo will lend to new grads the day they are licensed up to 325k for buy-in or start up. This is not including real estate. We will also do 100 percent financing on building purchases at this time as well if desired. We consider a doctor seasoned/experienced and no longer a new grad at 12 months of being licensed. This means we will lend any up to 325k for new grads in during the first year. After 12 months of being licensed, will lend up to 1.5 million on the practice loan. 100 percent Commercial Real Estate Financing is available as all times but not required. Student debt does not hurt lending at Wells Fargo & Co. It is considered a cost of doing business. 

QUICK TIPS

  1. Save your money
  2. Pay your bills on time
  3. Don’t go nuts with credit cards 
  4. Aim for a FICO score of 725 or higher

IF DENTAL DEMOGRAPHICS, BUSINESS PLAN, ETC LOOK REALLY GOOD, IS A START-UP STILL CONSIDERED MORE RISKY THAN AN EXISTING PRACTICE?

Not really. Lenders see pros and cons to both situations that can affect the success of a practice: 

Matthew Adrian – I think a dental practice startup with a good business plan has an excellent chance of success. Our loss rates on dental practice startups has been less than 1% year over year for the last 20 years. Demographics is critical whether you’re buying a dental practice or are doing a dental startup as you do not want to go into an area that is over saturated with doctors. The downside to a startup is that there is little cash flow at the beginning of the business being started and the downside of an acquisition is you are potentially inheriting staffing issues, old technology, and decor you will most likely have to change. I find that many doctors try to buy a dental practice if they can’t find a suitable one they decide to do a dental practice startup.

Michael Veader – Not necessarily. If you acquire a practice, it needs to be a good fit. For example, if you are a very strong producer looking to buy a small practice that could become problematic and vice versa. We look at the fit in all cases. Sometimes a start up is the right solution.

Clarke Moore – Not necessarily, if the dentist has worked in the geographic trade area as an associate dentist and understands the demand in the area, then risk can be mitigated or offset by those factors.

Mike Montgomery – There are pros and cons of both types of transactions. Buying an existing dental practice comes with any problems the practice currently has such as issues with staff. It does bring immediate cash flow, but the risk is in the transition with the seller, the staff, and the clients. A start-up gives you more control in who you hire, services offered, hours open, etc. but you must work as an associate part time to pay the bills until your practice is stable. There is no true answer – each scenario is different and the dentist must be willing to not only work the practice, but actively manage it.

Galen Van Otterloo – Yes, simply because of the unknowns involved in attracting patients to the new practice. An existing practice has a proven track record of patient visits resulting in revenue generation.

Jayson Foley – Not at Wells Fargo & Co. Is it more difficult to start your own practice versus buying one that is established? It is always more difficult to start anything from scratch, but we at Wells Fargo lend money to both in the same manner without reservation. It is all we do. The doctor should just know that if starting their own practice, make sure that the loan program is a graduated program as to allow for the business to get up and running before being required to make full loan payments. And for working capital to be made part of the loan. Not a separate Line of credit. True working capital provided with the loan. Startup lending with Wells is graduated to make sure the doctor has plenty of time to get on their feet before being asked to make a full payment and we always provide working capital when needed.

QUICK TIPS

  1. Consider demographics
  2. Consider demand
  3. Look for a good fit

WHAT ARE THE COMMON MISTAKES DENTISTS MAKE THAT CAN DELAY A DENTAL PRACTICE LOAN APPROVAL?

COMMON MISTAKES

  1. Not prequalifying for your loan
  2. Not providing the right documentation
  3. Not being prompt with providing the right documentation
  4. Late bill payments
  5. Misunderstanding legal information
  6. Not having the right team in place to plan and execute the project

Matthew Adrian – Doctors should get pre-qualified before they try to buy a practice or start-up an office. Getting prequalified is not a loan approval but you will get a good idea as to what your borrowing capacity is. If you’re doing a startup, most landlords will not talk to you until they know you have approval for financing. Also, you have more negotiating power with everybody you talk to you when you were approved for a start-up loan. With regards to a practice acquisition, before you make an offer on a practice you need to know if you qualify for the dental practice loan. Without pulling credit, we can determine what your general borrowing capacity is. The last thing you want is make an offer on a practice and then have your loan declined. There is no guarantee that you’ll all be approved until you actually go through the credit process. If you do your homework up front you can speed up the approval process and potentially avoid an embarrassing situation.

Michael Veader – The number one mistake is a lack of communication and/or providing the necessary documentation.

Clarke Moore – Some of the common mistakes we see in delaying the approval/closing process is lack of promptness in the delivery of financials or documents requested. Being proactive in getting financial information, application documentation, and closing items back to the bank is very critical in timely delivery.

Mike Montgomery – Common mistakes can be anything from missing a credit card payment to not understanding a non-compete agreement. The biggest mistake a dentist can make is not building their project team to help them. Planning a project can be very time consuming not to mention frustrating if you don’t have a knowledgeable team in place to help you. You may be a great dentist, but it is probably the first time you started or bought a practice. Do your research and hire a good dental CPA, attorney, banker, consultant, contractor, marketing team, and equipment specialist who are all niched in the dental industry. It will streamline the process and give you more time to do what you do best.

Galen Van Otterloo
For practice transition requests:

  1. Not having a detailed plan for the transition with the seller. This is a critical item that the bank wants to understand.
  2. Lack of documentation / proof of adjusted expenses or add-back expenses for the seller’s practice.

Start-up requests:

  1. A business plan that lacks depth including demographics and competitor analysis.
  2. Projections without a supporting narrative detailing the assumptions made when calculating revenue.

Jayson Foley – I would say not sticking with a specialty lender that only lends to doctors and truly understands what they practice. Dealing with a lender that truly doesn’t know dental. Banks often try using many programs like the SBA, state programs, ETC to offer the doctor what is requested because all banks want to lend money to doctors because of their risk rating being so low. However, dealing with a lender that needs to use these special programs for any reason to offer you a practice loan should be a sign you are in the wrong place and in for a long, unpleasant process that will be difficult to complete. These programs also lead to a lot of unnecessary cost for the doctors as well. Practice lending is simple, the question is are they a practice lender. Dealing with the proper company will eliminate 99 percent of the issues here.

WILL A DENTIST’S STUDENT LOANS AFFECT THEIR CHANCES OF RECEIVING DENTAL PRACTICE LOANS?

Matthew Adrian – No. Student loans are not considered negatively by our bank. We take into account all the debt the Dr. has when we do our analysis. We expect doctors to have student loan debt in the vast majority of the loans that we provide to our doctors the borrower has $250,000 in student loan debt and oftentimes much more.

Michael Veader – We factor the payment – however understand that there is, in most cases, going to be debt. This is rarely the reason a lender turns away a dental practice loan. Large obligations outside of student loan debt affect dental loan approval more adversely.

Clarke Moore – Not necessarily. Plans for repayment and history of repayment are looked at.

Mike Montgomery – The outstanding loan balance does not affect your chances of getting approved, but your payment history does. Make your payments on time each month and set them up on ACH. Speak with [Tooth & Coin] about deferment plans if you feel you cannot keep up with the current payments.

“The outstanding loan balance does not affect your chances of getting approved, but your payment history does.” 

Galen Van Otterloo – Banks that lend in the dental industry are accustomed to seeing student loan debt. Therefore it is not the student loan debt itself that is an issue. It is usually something else such as one of the following:

  1. Not making payments on time.
  2. Putting the loans in forbearance to avoid repayment.

Jayson Foley – Not at Wells Fargo & Co. At other lenders that do not solely focus on doctor only lending, Yes.

WHEN SHOULD A DENTIST GET IN CONTACT WITH A BANKER ABOUT RECEIVING A DENTAL PRACTICE LOAN?

The answer: Right now!

Matthew Adrian – If you are considering owning your own practice you should talk to a bank immediately. We can provide valuable insight into the type of project you’re looking to complete and help you get in touch with the right professionals to help you with your project. The advice you will get from a dental banker is free and you should use us as a resource as you move forward with your decision.

Michael Veader – As soon as possible. You should know what you can qualify for before you start looking. Similar to buying a home.

Clarke Moore – Make contact with Evolve Bank and Trust before you graduate dental school. Preparation and options are key, so utilizing a mentor in the industry and making contact with three financial institutions for loan options enhances your chances in getting the best deal on your loan.

Mike Montgomery – It is always recommended to contact your banker before you begin negotiating prices on buildings, leases, equipment, etc. so that the bank can pre-approve you for a specific amount. It is common to see a dentist begin a project without financing in place only to find out that they are over budget. It is much easier for you as a borrower to figure out the budget to make your plan than after. This also gives you some negotiation flexibility since you know what you can afford.

Galen Van Otterloo – I always recommend that they begin a relationship with the bank once they begin to start looking for a practice.

Jayson Foley – I think it is best to get in touch with a lender when you are seriously considering buying or starting a practice. The lending process should not take over 2 to 3 three weeks to complete from start to finish. So, I think getting things in order at that point is best. This way, when you find a location or practice you are looking for, you can be ahead of the ball. This will impress sellers and make them take negotiations with you more seriously and can only work to your advantage.

WHEN A DENTAL PRACTICE LOAN IS BEING FUNDED, HOW CAN YOU GO ABOUT DISCUSSING BREAK-DOWNS IN COST. (I.E. IF SOME FUNDS ARE EARMARKED FOR EQUIPMENT, BUT THE DENTIST FINDS A GREAT DEAL SOMEWHERE AND THINGS COME UNDER BUDGET, CAN THAT BE MOVED TO A DIFFERENT PLACE SUCH AS WORKING CAPITAL?)

Matthew Adrian – If there is a need to provide more working capital on a loan we’d be happy to consider the request. We just need to understand what the money’s going to be spent on. We have the ability to offer working capital in the loan or we can offer line of credit or a combination of the two. We do not want anybody to borrow much money so we will use our expertise and dental lending history when lending money to the dentists.

Michael Veader – Absolutely. We are very flexible in our fund allocation (as long as they make business sense).

Clarke Moore – It’s not difficult to move things around as necessary, Evolve Bank will be flexible wherever, and whenever possible.

Mike Montgomery – A typical budget will list out a breakdown of all items needed for closing including some a first time buyer may not think about, ie:

  1. Construction
  2. Equipment
  3. Working Capital
  4. Legal
  5. Permits
  6. Architecture
  7. And so on

The bank will disburse funds as needed during construction so the loan payment will gradually increase. If less working capital is needed and there is an increase in the cost of materials for construction, the loan is flexible enough that funds may be reallocated as necessary. If there are available funds once the project is complete, the borrower may opt to take the balance in working capital or lower the loan amount.

Galen Van Otterloo – Generally the bank is going to want finalized numbers prior to drafting dental practice loan agreements. The finalized numbers always need to match the approval. Therefore, it is best for the Dr to have their numbers finalized well in advance of closing when at all possible. Some minor fluctuation is of course to be expected from time to time.

Jayson Foley – I think looking over and understanding the evaluation (if purchasing an existing practice) and working with a team of experts who have started many practices (if starting) is key. I am referring to your CPA, attorney and your lender. These individuals must be experts in the field of Dentistry. This way you will have an idea of what things should cost ahead of time and set a reasonable budget in the beginning and not just assume what things might cost. So, it is never an issue to reallocate funds from say equipment to lease hold improvements (sheet rock, carpet, paint, light fixtures) to working capital. The key is to keep non equipment related things (soft costs) to 70 percent of a project or less. This will make your lending go smoothly.

QUICK TIPS

  1. Work with a team of experts to create a budget
  2. Make business decisions that make financial sense
  3. Expect flexibility in the allocation of funds

WHEN SHOULD A DENTIST CONSIDER AN SBA LOAN OVER A CONVENTIONAL LOAN?

Matthew Adrian – Generally speaking the SBA is a good resource when you cannot get conventional financing. The SBA is great at funding certain types of real estate transactions and is very good at providing ground up CRE instruction for building projects. When it comes to getting approved for a dental start-up loan or an acquisition loan to buy a practice conventional lenders are the way to go because we offer fixed interest rates for the life of the loan and very low closing costs. The SBA has a variable interest rate loan and high closing costs.

Michael Veader – If the terms and overall costs make more sense than conventional. In most cases a Dental Specific Lender can provide a higher Loan to Value Loan (up to 100%) at a much lower rate and cost (lower fees).

Clarke Moore – Evolve Bank is a preferred SBA lender who specializes in dental practice financing due to the low industry risk. We can provide up to 100% financing in some cases. So with that being said, going the SBA route can give you a high leverage, lower down payment, and favorable amortization schedule on your loan versus going through a conventional lender.

“SBA loans have a common misconception that they are for borrowers that cannot get approved for conventional financing. This is not the case.”

Mike Montgomery – SBA loans have a common misconception that they are for borrowers that cannot get approved for conventional financing. This is not the case. The SBA provides loans for most start-up businesses. Whether it is a hair salon, mechanic shop, restaurant, or dentist, these loans provide a guarantee by the government which makes a stronger case for the loan as long as the borrower has good credit history and a strong business plan. SBA loans may also allow for longer terms and more financing than some conventional loans. While a conventional loan may require a 10-20% down payment which the borrower may or may not have, SBA loans can be more flexible. For example, Live Oak Bank provides up to 100% financing for real estate purchases. While both types of dental practice loans are great, it is always a good idea to weigh all your options.

Galen Van Otterloo – Generally an SBA loan is a better option on Real Estate financing because of the lower down payment requirements which make it easier to qualify. Outside of that, conventional financing is generally preferred in a vast majority of circumstances.

Jayson Foley – The SBA serves a very good purpose and should only be used for Commercial Real Estate purchases or when doing projection based lending for large expansions of the practice later on. There are more than one type of SBA loan. The idea is to provide a longer term and more affordable payment on a fixed term when doing large construction projects or building purchases. It is never to be used to start or purchase a practice. It is not needed for that. The SBA is a great tool when appropriate.

WHAT IS THE ONE PIECE OF ADVICE YOU WOULD GIVE A DENTIST IN REGARDS TO LOOKING AT DIFFERENT DENTAL LOAN OPPORTUNITIES? (SUCH AS DENTAL PRACTICE LOAN RATES)

QUICK TIPS

  1. Consider all aspects of the loan option
  2. Understand the loan terms
  3. Look at the big picture — interest rate is not everything!
  4. Being helpful, courteous, kind, and truthful in business

Matthew Adrian – I think doctors need to take into account all aspects of the loan package and not just the dental practice loan interest rate. Interest rate is certainly the most important factor but you also have to figure closing costs, prepayment penalties, and banking products and the costs of those products. If you desire to fund future projects, will the bank you choose enable you to do that?

Michael Veader – Make 100% certain that you understand the loan terms. Pay attention to fees, terms and prepayment penalties.

Clarke Moore – There are a couple things that I personally have done and still do in my business to be successful. Do not be scared to leverage your resources and utilize your centers of influence and/or mentors. Preparation is key. Ask questions. Be consistent. Always under promise and over deliver. Follow through with what you say you will do. Being helpful, courteous, kind, and truthful in business is hard to find in this day and age, so this will separate you from the competition.

Mike Montgomery – Rate is not always the most important thing to consider in deciding which loan option to choose. Many loans provide additional benefits that others do not. Consider the bigger picture:

  • Is the loan providing 100% financing?
  • Are there graduated payments or an interest only period to help me during the transition period?
  • Will working capital be included to assist me in paying vendors and staffing the first several months?

Look at the big picture – most dental start-up loans may have a higher rate due to the risk but with flexible pre-payment penalties you can swiftly grow your practice and refinance when the time is right.

Galen Van Otterloo – I know this goes against the trend, but I would recommend they not make interest rate their entire focus when comparing financing options. This is too often the case and it results in the borrower missing other critical details that affect their overall costs, their flexibility, and their bank relationship.

Jayson Foley – Check to see if the lender you are considering is accredited. For example, Wells Fargo Practice Finance is the only ADA recommended lender. Make sure that the lender you choose is a dental specific lender and is providing 100 percent financing. No money down, no personal assets required for collateral, no banking requirements. It should be 100 percent financing with no traditional costs and the SBA should not be used for your dental practice loans.

WHAT STATES/REGIONS DOES YOUR BANK COVER FOR DENTAL PRACTICE LOANS?

Matthew Adrian – Bank of America Practice Solutions operates everywhere in the country.

Michael Veader – I can provide lending in all 50 states.

Clarke Moore – We are a national preferred SBA Lender and can do conventional lending in the state of Arkansas and surrounding states.

Mike Montgomery – All 50 states and US Territories.

Galen Van Otterloo – We work nationwide.

Jayson Foley – We currently provide service to all states in the US.

DO YOU WORK WITH START-UPS, ACQUISITIONS, OR PARTNERSHIP BUY-INS?

Matthew Adrian – All the products we offer are fixed conventional loans. We do not offer any SBA loans. We offer 100% financing plus working capital for acquisition loans and start up loans. Generally speaking, the only piece of collateral we take is the practice.

Michael Veader – All of the above for Dentists.

Clarke Moore – We do start-ups, practice acquisitions, and expansion. Partner buy-ins are tricky through SBA but can be looked at and done through our commercial banking group.

Mike Montgomery – Start-ups, acquisitions, and expansions.

Galen Van Otterloo – Yes. Our start-up program is probably the weakest when comparing us to say Bank of America and Wells Fargo.

Jayson Foley – We currently will finance 100 percent for startups, practice buy-ins or full purchases, expansions, re-locations, equipment only, and practice debt consolidation.

DO YOU PROVIDE SBA OR CONVENTIONAL LOANS?

Matthew Adrian – We provide financing for dental practice start-ups, acquisitions, partition buy-ins, real estate transactions, and equipment financing.

Michael Veader – Conventional for the lion share. However we have an SBA department that we do partner with (typically on Commercial Real Estate).

Clarke Moore – Our bank offers both SBA and conventional lending products for dentists.

Mike Montgomery – We provide SBA 7a loans and specialize in 100% financing for real estate. In 2015 we will lend over $250 million to dentists and are the second largest SBA lender in the country.

Galen Van Otterloo – Both.

Jayson Foley – We offer conventional/dental specific loans in practice finance but have the SBA at our disposal if it is ever needed for a special project for one of our doctors.

Editors Note: Thanks to all of our interviewees for the amazing responses and to the Tooth & Coin community for providing the questions. 

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