Startup Success: How Recent Graduates May Qualify for Competitive Dental Practice Financing Rates

After graduating from dental school, a diminishing number of dentists open their own practice. Of recent graduates between 2016-2020, just 21% own their own practice according to the American Dental Academy (ADA). There are several reasons for this, from increased educational debt to work-life balance, but for some, it may be as simple as not having a business background. The path from graduation to ownership presents a significant financial hurdle and requires major personal buy-in. If you don’t understand the financing options available to you in the dental industry or how to navigate the application process, the idea of opening your own small business may just seem daunting. understand the financing options available to you in the dental industry or how to navigate the application process, the idea of opening your own small business may just seem daunting.

Financing a dental practice is unique, given the different business needs and banking services of the dental industry compared to, say, the retail industry. Lenders must weigh the dentist's clinical abilities and future earning potential against high level of student debt and zero business history. This calculus on a loan application helps determine the dental practice financing rates available to the borrower. Here’s what to know about dental business loans.

The Unique Financial Challenge for New Dentists

A recent graduate faces a financial profile that is highly concerning to general commercial banks.

1. High Debt Burden

According to the Education Data Initiative, the average dental graduate owes $296,500 in student loan debt. This debt significantly impacts the dental practice financing rates offered by lenders. Of course, student debt is very common, and you can address your plans to repay it in the loan application, even if the loans are currently in deferment., and you can address your plans to repay it in the loan application, even if the loans are currently in deferment.

2. Lack of Business History and Collateral

A new graduate has no financial history for the practice itself. They lack business tax returns, existing practice cash flow, and traditional business collateral. Some banks may see this as a risk, leading to poor dental practice financing rates or outright denial.

3. Understanding Specialized Lender Requirements

Traditional lenders may be less willing to work with a recent graduate to open a dental office. However, a specific ecosystem of lenders that focus exclusively on healthcare and dental financing does exist. These lenders look forward at the predictable, high earning potential of a successful dental practice, using their own specialized metrics to determine dental practice loan interest rates.

To secure the best dental practice financing rates, you must speak the lender's language on a startup loan application.

4. The Personal Guarantee (PG)

A Personal Guarantee (PG) is almost always required for most financing solutions. Since businesses, rather than individuals, typically apply for small business loan options, the business is primarily liable to repay the debt. However, if a dental practice fails to repay a loan, a personal guarantee says the lender can pursue the owner’s personal assets. Because the practice has no collateral, the PG serves as the biggest personal commitment a new dentist makes to a loan. It underpins the calculation of dental practice financing rates.

5. Underwriting Intelligence (UI) and Projections

When a startup has no financial track record, lenders rely on Underwriting Intelligence (UI) to determine dental practice loan rates. This process compares the details of your proposed practice to industry benchmarks.

Some things the lender will assess include:

• Profit potential: Based on the dentist’s specialty and the practice’s equipment, what is the realistic annual revenue? (They may encourage you to get equipment loans for new practices, as well.)

• Operating expenses: Are the projected costs for staff, supplies, and rent in line with industry standards?

A detailed business plan that aligns with the lender’s UI models will demonstrate viability and help you negotiate lower dental practice financing rates.

6. Fixed Charge Coverage Ratio (FCCR)

The FCCR is a measure lenders use to assess a practice’s ability to cover its debt obligations. It’s calculated by comparing the practice’s anticipated cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization) to its fixed loan charges.

A higher projected FCCR demonstrates a wider margin of safety for the lender. So, a higher FCCR should result in more competitive dental practice financing rates.

7. Loan-to-Value (LTV) and Owner Equity

Specialized lenders may offer 100% business financing for qualified dental acquisitions, by injecting some of your own capital as a down payment can lower the risk for the lender and demonstrate your commitment to the practice. This could improve your dental practice financing rates.

The loan-to-value (LTV) ratio will also play an important role in determining dental business loan rates. This is the ratio of the loan amount to the value of the asset being financed. (It’s easier to determine for fixed asset loans, like equipment or commercial real estate loans, but may still factor into more open-ended business loans.) A lower loan amount compared to the amount of equity you’ve invested could help secure lower dental practice financing rates.

Choosing the Right Financing Structure

The way you choose to open a dental practice will impact the risk profile of the business and, consequently, the dental practice financing rates.

1. Practice Acquisition Financing

Buying an existing, established practice is less risky than opening a new one from scratch. The practice already has a patient base, cash flow history, and an established reputation in the area. As such, you may be able to find more competitive dental practice financing rates. The lender has tangible historical financial data to reference, and a fixed acquisition cost to help value the purchase.

If you go this route, remember to include a working capital buffer in the loan amount beyond just the purchase price.

2. Startup Financing

Building a new practice from the ground up is riskier and potentially more expensive, but it does provide you with more control over the new practice. You may have to account for construction, new equipment, new leases, and a range of other costs you wouldn’t consider with an acquisition.

For lenders, this is higher risk since there’s no historical revenue, you may not have an established business operating history, and the practice will almost assuredly operate at a loss at first. For these reasons, dental practice financing rates are generally higher than acquisitions.

For recent graduates seeking the most competitive dental practice loan rates, acquiring an existing practice is likely the more cost-effective option.

How to Secure the Best Dental Practice Financing Rates

Recent graduates can take a few steps to improve their loan applications and find an affordable loan that meets their unique needs.

Create A Thorough Business Plan

If you’re applying for a startup loan, the business plan is a substitute for business history. It’s your best chance of securing a reasonable fixed rate. It should include:

• Detailed financial projections: Provide realistic 3–5 year financial forecasts. Demonstrate how patient volume is expected to grow and when you anticipate profitability.

• Market analysis: Include a thorough analysis of local competition, patient demographics, and traffic patterns.

• Contingency plan: Demonstrate that you have a plan to meet debt obligations even if revenue targets are missed.

Manage Personal Finances

Absent any business history, your personal financial health will directly impact the dental practice financing rates offered. Take time to improve your credit score and pay down debts as much as you can to lower your debt-to-income (DTI) ratio. Student debt is unavoidable, but you can pay down car loans, credit card balances, and other controllable debt to support your application.

Seek Mentorship and Specialized Brokerage

Many lenders prefer applicants who have sought expert guidance before applying. Specialized dental brokers understand the lender landscape and can help you in your loan search. They can compare offers from multiple institutions to find the best dental practice financing rates tailored to your specific situation.

If you’re a recent grad, you should include your resume to show that you’ve worked for at least a few years as an associate.

Shop Lenders

Don’t limit yourself to one financial institution. Get at least three competitive quotes from both major banks with dedicated healthcare divisions and specialized dental lenders. Active negotiation is one of the most effective ways to secure the lowest possible dental practice financing rates.

Final Thoughts

The journey for a dental grad to own their own dental practice is complex. It will take time to navigate the lending landscape and do the necessary due diligence to understand the financing options available in dentistry. Securing the most competitive dental practice financing rates is another big piece of the puzzle. By building your credit, establishing a clinical history, and thoroughly exploring and vetting your different paths to ownership, you can achieve ownership faster and cheaper.