The Best Financing for Buying a Dentist Office
November 17, 2021
November 17, 2021
While it’s certainly a different industry than a bakery, yoga studio, or liquor store, make no mistake: the attributes that make a successful dentistry practice are the same attributes that make any other business successful.
The entrepreneurial dentist will still need to be cognizant of many of the same factors, missteps, and aspects of business that a hotel owner would need to be cognizant of. You need to consider your cash flows, your lines of credit. You need to have a top-shelf business plan, and you need to have your eyes on the horizon as you grow.
But dentistry does offer a few twists and turns as an industry and thus presents a few specific advantages and disadvantages to the aspiring business owner.
Dentists have three main reasons to look into acquiring a dental practice loan.
Firstly, there’s the opportunity to start a new dental practice. It’s an appealing option for many of the most obvious reasons. Practice owners are in full control of the future and growth of the practice. They’re able to establish and care for the business they want to run in the way they want to run it. Financial success as the owner of a private practice is also a huge factor.
However, a dental practice startup is also among the riskiest borrowing situations in the industry. When a new dentist graduates from dental school, they’re typically saddled with hundreds of thousands of dollars in student loan debt with sometimes astronomical monthly payments. Starting up a practice on top of that will require purchasing or leasing real estate, dental equipment, and more. It’ll require some working capital to pay staff, and none of those expenses comes cheap. Those expenses can truly take a bite out of incoming cash flows, making a dental practice startup somewhat risky for lenders.
A second path to owning a dental office is through practice acquisition. While an existing practice means that the new owner may not have the sort of total control over a brand new practice, there are a few material advantages to purchasing an existing office.
Firstly, dental equipment is remarkably expensive. Purchasing the equipment necessary to run a successful practice can cost six figures. By purchasing an existing practice, that headache has been reduced.
In addition, a startup has no existing customers. And without customers, there’s no guarantee of cash flow. Acquisition solves that issue. Acquiring a practice likely means acquiring existing real estate and clientele, meaning that you’ll jump right into an existing stream instead of trying to create everything for yourself.
Finally, there’s the problem of commercial real estate. By acquiring an existing, profitable practice, you’re selecting a company that already has shown that its location leads to a successful company.
Perhaps you already own or part-own a dentist practice and are looking to take your company to the next level. You can look at expanding your existing company much like a combination of the two above paths. Because you’ve got existing clientele and existing cash flow, you won’t need to worry there, but you’ll also get the chance to pivot or adjust your services and location in such a way that you might be able to boost profits.
There are innumerable loan options for the aspiring owner of a dental business. Like Bank of America, some financial institutions Bank of America, even have entire divisions set up for dental practice financing.
That having been said, the best loan for every dentist office owner can depend on many factors, like credit scores, student debt, path to ownership, desired loan amount, target use, or the loan terms.
Like every part of owning a business, you should take the time to examine your business plan and understand the “why” behind every part of your loan to ensure that your financing option is the best one for your company. And your business plan should of course be tailored specifically to dentistry.
Loans from the United States Small Business Administration (SBA) are, for many borrowers, the ideal solution. If you’re looking for the lowest interest rates, a long repayment term, and flexibility of purpose, you may want to look into any one of the various SBA loan programs.
SBA loans are a blanket term for several types of loans that the federal government guarantees as a partner with qualified private lenders. The government guarantee is what gives borrowers favorable terms. For a lender, the government’s backing means that it’s perfectly acceptable to lend high amounts with low interest rates because it’s highly likely that the loan will be repaid.
Of course, the government’s backing is the backing of US taxpayers, so SBA loans are famously difficult to qualify for. They require an absolute mountain of paperwork, take as long as two months to be approved for, and will require the business owner to be at peak creditworthiness. In short, they’re low risk for everyone involved, as long as everyone involved is taking a ton of care.
SBA loans can be huge – anywhere up to $5,000,000 and can be repaid as far out as 25 years. They can be used for a wide variety of purposes as well. They can be used to buy equipment, pay employees, refinance existing loans, buy real estate, and more. The SBA itself has published a success story about a dentist using an SBA loan to purchase real estate. For many aspiring practice owners, if you’re able to qualify for an SBA loan, it’s worth the time and effort.
Think of term loans like SBA loans without the government guarantee. They’re what you picture when you think of a loan – you borrow money from a financial institution and agree to repay that loan with interest over a set amount of time.
But without the government guarantee, there are two huge differences. First, because the money being lent isn’t guaranteed by taxpayers, business owners will find that the terms may not be as favorable as they’d be in an SBA loan, but because the government isn’t involved, they’re often going to be quicker to approve and require slightly less paperwork.
These loans can also be large, but will often come with shorter repayment terms and higher interest rates.
If you’re looking to borrow slightly less money (up to about $250,000) and have the cash flow to support higher fees, interest rates, and quicker repayment terms, an alternative or online lender, like Biz2Credit, might be an excellent path for financing.
Because alternative lenders are not banks, they’re able to cut much of the red tape that can make bank lending a hassle. You can expect lightning-fast approvals (as short as a single business day!) and lower standards of creditworthiness.
However, to make up for those advantages, alternative lenders offer smaller loans, higher interest rates, and generally high fees.
Equipment financing is exactly what it sounds like. An equipment loan is given for the express purpose of buying, leasing, or upgrading new equipment. In the healthcare field, that can be remarkably expensive, but also vital to growth and expansion.
Like all small business loans, there are advantages and disadvantages to an equipment loan. For one thing, dental equipment financing tends to have very low interest rates. Why? Because the lender holds the qualifying equipment as collateral against the loan. If the borrower is no longer able to make the necessary payments, they simply repossess and sell the equipment. There’s minimal risk to the lender, so the borrower can expect favorable terms.
On the other hand, equipment loans are not flexible like other forms of business financing. They can be a godsend if an x-ray or mobile dental cart is damaged or outdated, but if the office manager needs a paycheck in a tight month, equipment financing does you no good.
Many small business owners hold a line of credit in their back pocket. A line of credit functions much like a hybrid between a loan and a credit card. A financial institution agrees to a certain credit limit and interest rate, but only requires payment on money actually borrowed.
That flexibility makes business lines of credit an excellent stopgap in a short-term crisis. Many borrowers will seek approval for one and only use it in desperate times, or when a short-term opportunity becomes available.
For example, if a nearby dental practice is seeking a new buyer quickly, traditional bank loans or SBA loans might take far too long for approval. In such times, an acquiring owner could draw on an existing line of credit to take advantage of the opportunity.
No matter which path to practice ownership you’re seeking, and no matter which type of loan is most suitable for your needs, there are a few things you should do to save maximum money over the long term and set your practice up for success.
Credit scores are vitally important when it comes to loans. And regardless of which loan type you’re going for, building your credit score is key. That means maximizing your debt-to-income ratio, not missing any payments on credit cards or existing loans, and preventing too many hard inquiries.
These strategies and more are all key not only to your personal credit score but to your business’s credit score.
Setting up your business’s credit score might require paying off an existing loan before expansion is possible. It could mean debt consolidation to simplify preexisting debts. Or it could mean finding ways to keep debt steady while increasing profits.
Acquiring capital can be a long, complex process. Once you’ve decided which type of loan you’re going to seek, you should research the institutions able to provide that loan and understand the application process inside and out.
You want to make sure that you’re fully cognizant of everything you need to successfully apply. That means understanding the paperwork necessary, the credit requirements, and loan availability. It also means knowing if you’re qualified for that loan, or if your business meets the criteria required.
As long as there are people with teeth, there will be dental health providers doing excellent business, and that means lenders will always be underwriting loans for dental practices. So make sure you do everything possible to understand the business plan, the necessary steps for capital acquisition, and go forth with confidence that you’ll be able to finance a practice that your patients will love.