The idea of business loans and taking on additional debt is not exactly a topic that most people gravitate towards. Yet in a dental transition, it’s likely a key piece to achieving practice ownership and one’s overall financial goals.

When it comes to lending, most buyers are concerned about finding the best rates, while sellers want to ensure their buyers can get lending for the practice purchase. In order for buyers and sellers to find the best lending solution, they must also understand what banks look for in the practice and borrower’s financials.

When banks assess each situation, the following factors help determine how much the banks will lend.

The Buyer’s Personal Finances

For one, lenders will want to examine the buyer’s personal financial picture, assessing their personal credit and debt. The type of consumer debt that stands out most to lenders includes credit card debt, car loans and mortgages. Some types of debt, like student loans, have less of an impact on lending decisions and interest rates.

“Any lender familiar with the dental industry is going to fully understand and expect that new doctors have student loan debt even if they’ve been working as an associate for a while,” NDP Head of Consulting Bridget Schwebke said. “As opposed to the typical consumer debt, the banks consider student debt as productive and a career investment.”

What banks are also concerned about is a buyer’s liquidity. Having enough cash readily available reduces the risk to the lender as it shows the buyer is living within their means (i.e., they are financially responsible). It also means they have additional liquidity in case there are unexpected expenses, or the practice struggles to perform after the practice purchase. Having greater liquidity helps buyers achieve the best rate possible from lenders.

The Practice’s Cash Flow

After vetting the buyer’s personal financial situation, the bank’s primary concern is the practice’s profitability, which again relates back to liquidity.

“For the banks, the practice’s cash flow is the foundational piece when deciding their willingness to lend to a buyer,” Bridget said. “If they’re loaning money for a practice, they want to see that the cash flows of the practice will support the overhead and debt service to the buyer upon the purchase.”

Consistency in the Practice

Not only is profitability important in the practice, but stability is also essential. Consistency—especially regarding cash flow, collections and overhead—adds a sense of predictability and confidence. It means less risk for all parties involved.

“It’s worth noting that banks are going to put more weight on the most recent years of the financial statements,” Bridget said. “Even if the practice has been consistently collecting $1 million over the years, but there’s a recent drop in the last year, that’s going to cause lenders to question.”

It’s important that owners don’t slow down too much or see a drop in revenue right before deciding to transition their practice.

Risk in the Practice

Risk is what differentiates one practice from another and involves factors that can be both negative and positive. Banks will consider how various risk factors have a positive or negative impact on the practice value. From staff tenure, equipment age and condition, to the seller’s transition plan, several elements contribute to the amount of risk in the practice.

One important risk factor is the doctor production and if the buyer can complete the work. Banks will question, “Does the buyer have the experience and capability to do the dentistry?” To determine the answer, banks will look at the buyer’s experience, historical production and collections and procedure mix to demonstrate they are capable of taking over the target practice.

It’s Not About Potential

Make note that lenders don’t offer money based on the potential of what a practice can do. They’re going to pay based on what the practice has done and especially what it has done recently. Where the practice financially stands at that point in time is how it’s going to be valued.

“A practice may acquire another, or they may open up a new location, and owners often expect it to have an immediate increase in the value,” Bridget said. “However, that investment will require time to see growth in collections and improvement in the overhead.”

If owners want to receive credit for any significant investment, they need to ensure they have allowed ample time for it to have proven itself in the financials on a consistent basis.

Finding the Best Solution for Your Goals

At the end of the day, most lenders have a similar objective as the buyer or seller: finding the best solution that meets the doctor’s personal and professional goals. Building an educational base and developing strong financial habits early on will propel any doctor in the right direction toward their goals.

The advisors at NDP make the dental transition process seamless by not only guiding doctors through each step, but also engaging dental-specific professionals, such as lenders, when and where needed. Contact our team if you have questions regarding lending or practice transitions.