Are You Leaving Money on the Table?

2017 Catalyst – Issue 3
By: Lauren Cover & Doug Fettig, CPA, MBA

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Financing Acquisitions, Expansions & Upgrades

By: Doug Fettig, CPA, MBA

Throughout the course of one’s career in dentistry, opportunities arise that call for outside financing. Recent dental school graduates dream of starting their own practices. Existing practitioners want to upgrade or expand their practices or perhaps purchase a satellite location. All such initiatives tend to be capital intensive, and therefore generally require taking on debt. Fortunately, lenders deem dentists a good credit risk given their low default rate on loans.

This article provides guidance on how to prepare for making a loan application and what options are available to secure financing.

Get Your House in Order
Like other entrepreneurs, dentists need to present themselves and their businesses as worthy of investment. Personal credit history is a good place to start as it plays a key role in lender determinations.

The three major credit bureaus—Equifax, Experian, and TransUnion—provide free credit reports and credit scores based on payment history, outstanding debt, length of credit history, credit inquiries for loan applications, and types of credit in use. The higher the credit score, the greater the opportunity to secure a loan and obtain attractive rates and terms. To increase one’s score, credit reporting errors should be challenged and cleared. Past due bills should be brought current and unneeded debt retired. A good track record combined with a manageable debt load suggests an individual with the requisite discipline and restraint to meet future obligations.

Create a Plan
A dentist must create a business plan that demonstrates knowledge of the relevant market, a credible plan for generating revenue in that market, a viable operational model for service delivery, and an administrative approach that yields a sustainable business. He or she must have an awareness of the demographics, indicators also provide critical insights—e.g., production and case acceptance, continuing care, mix of services and relative profitability, scheduling optimization, collections, etc.

Armed with this information, the dentist can identify the rationale for external funding, define the use of loan proceeds, and work through the mechanics of how the loan would be repaid. This analysis also determines whether he or she is eligible for credit and, if so, which loan types and terms are best suited to the present need. While many of the skill sets required to conduct this preparatory work fall outside one’s professional training, CPAs, tax advisors, consultants and others who specialize in this market are available to provide expert guidance and support.

Finally, some lenders require life and disability insurance (or business overhead insurance) as a condition of financing. This requirement arises due to the fact that loan repayment depends upon the life and health of the dentist. As underwriting for this insurance can take 4-6 weeks, it’s worthwhile to start this exploration well in advance of tendering a loan application.

Small Business Administration
The Small Business Administration (SBA) offers a number of programs to help dentists launch or expand their practices and help them flourish.

SBA 7a General Purpose Loan
Using a SBA 7a general purpose loan, dentists have the ability to:
• Finance or refinance their practice
• Build, purchase, renovate, or refinance
a building or facility
• Finance equipment
• Consolidate debt
• Obtain more working capital
To be eligible, a dental practice must operate for profit, conduct business in the U.S., have revenues less than or equal to $7.5 million, and have reasonable invested equity. Equity may be gifted or contributed by a seller for practice acquisition. One-hundred percent financing may be available for established practices with a strong balance sheet. The borrower must demonstrate a need for funds to address sound business purposes that exceed the capacity of alternative resources (e.g., personal assets, cash flow from business operations). And the borrower must not be delinquent on any debt obligations to the U.S. government. Loan maturities vary—e.g., up to seven years for working capital, up to ten years for equipment, and up to 25 years for real estate. The SBA expects all loans to be secured.

SBA 504 Loan
An SBA 504 loan can be used to build a new office, renovate or expand an existing facility, or refinance a current facility as part of an expansion. While it is more difficult to structure 100% financing, this program offers fully amortized, long-term commercial financing at low rates with no balloons, calls, re-qualifying, or refinancing at a later date. Acquisition of energy efficient technology enhances borrowing capacity.

Commercial Lender
As noted earlier, low default rates among dentists make them attractive credit risks for commercial lenders. Many lenders offer 100% financing for practice acquisition, expansion, and upgrade. Limits to a borrower’s credit capacity include unattractive personal credit histories, high debt in relation to practice assets or equity, and concerns regarding core business skills to make a practice thrive. The latter includes one’s ability to develop and retain patients, make compelling arguments to accept treatment plans, and institute effective business and fiscal management practices. As with SBA loans, commercial lenders expect to secure loans with some form of collateral.

Build Relationships
Building relationships with prospective lenders yields a number of benefits. Dentists can get educated on the approval criteria for the lender’s underwriting department and use that information to build a strong loan application. Dentists can also learn about the types of financing available and choose the one that best aligns with current needs. Assuming dentists demonstrate competency in their practice management and ask reasonably intelligent questions, they can influence their lending officers’ subjective appraisal and secure an ally in the loan application and approval process.

Talk to Several Lenders
A lender’s market presence may change based on its desire to establish a position (or increase share) in the dental market, its overall credit availability, and its recent experience with defaults. As such, it’s worth talking to a few different lenders (or a commercial broker) to find the most attractive terms. It may also be prudent to make application to more than one lender to improve one’s negotiating position.

Seller Financing
When dentists do not have sufficient borrowing capacity or wish to manage the time frames over which they assume debt, sellers may need to participate in financing.

Associate Partnership
With an associate partnership buy-in to buy-out, a solo practitioner adds a dentist who agrees to purchase 50% of the practice within a prescribed time frame. This arrangement works best among individuals who enjoy collaborating with other professionals and for whom a mentoring relationship confers mutual benefit. After working as partners for a pre-set or variable time frame, the associate agrees to purchase the remaining 50% share. If the practice has grown to occupy two full-time dentists, a strategy must be put in place to support the original dentist’s retirement.

Associate Buy-Out
An associate buy-out generally involves a shorter period of employment during which the associate establishes rapport with staff and patients while securing the financial resources for business transfer. The seller may opt to reduce his or her patient load gradually to make room for the buyer while adjusting to a new phase of life. The seller may remain as a part-time employee after the transfer for some period of time.

Formal Contracts
In either case, formal contracts dictating the terms of the agreement reduce the incidence of costly misunderstandings and conflicts downstream. These contracts specify both parties’ duties and obligations, the financial terms of engagement, and time frames for key milestones and/or decision points. This recommendation proves useful even when transactions involve family members as it ensures that everyone is on the same page.

When dentists cannot secure loans independently or enter into associate buy-out arrangements, they have the option to enlist the support of family members or friends. Recent graduates may draw upon this form of financing due to their high debt load from dental school combined with their lack of experience in practice management and loan repayment. Such cases call for a brutal honesty with respect to the borrower’s reasonable ability to service the debt and the lender’s reasonable ability to assume the risk of loss. All parties to loan default experience unpleasant side effects financially and emotionally. When such transactions involve intimates, the impact to relationships can be long-lasting.

Dot Your I’s and Cross Your T’s
When preparing a loan application, make excellence the hallmark of your efforts. Provide a complete application with all required schedules and attachments. Be your own advocate and make a compelling business case for your credit request. Offer written explanations for anomalies or potential lender concerns. Identify assets that can be pledged as collateral. Respond quickly to lender inquiries.

Access to credit correlates strongly with practice success. Make time to attend to this key aspect of your practice. Leverage outside expertise to help polish and present your personal and professional stories in the best possible light.

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