Financing Your Dental Practice Purchase

When applying for a dental loan, lenders will review your personal credit history. While it is ideal to have a score above 700, many lenders will approve loans to borrowers with a score of 650 and above. Be sure to review your credit history in advance and report any errors that might adversely affect your score. Beyond your credit history, lenders will also consider whether you are living within your means by reviewing your revolving debt, such as credit card balances.

Our preferred lenders specialize in financing dental practices and can finance up to 100% of the sales price for qualified borrowers. Lenders recognize that recent graduates will have a considerable amount of student loan debt. In these cases, factors such as irresponsible amounts of credit card debt, luxury purchases, or expensive automobile purchases could negatively affect your loan application. If you are an inexperienced graduate, dental practice associateships present a good way of gaining credible work history quickly to compensate for a lack of professional experience or personal financial assets. Lenders require a general dentist to have at least one year of work experience after earning their dental degree. Specialists may qualify for financing upon completion of their residency. Prospective buyers are advised to put some cash aside to demonstrate liquidity and financial responsibility.

The difference between conventional financing and Small business Administration (SBA) financing is most notable when discussing the loan terms and process. Conventional lenders typically specialize in providing financing to dentists, offering 100% financing, loan terms of 7-15 years, fixed interest rates, minimal loan fees (ranging from $2,000-1% of the loan amount), and minimal prepayment penalties. On the other hand, SBA loans typically feature a maximum of 90% financing, a 10-year loan term, floating interest rates, fees of approximately 3% of the loan amount, and substantial prepayment penalties. The conventional loan process is usually very efficient and takes only 30-45 days to complete while the SBA loan process can be more cumbersome and take up to 120 days to complete. SBA loans also have limitations on the amount or down payment requirements for the amount of goodwill being financed. However, it is important to note that the SBA’s underwriting criteria is often not as strict as that of conventional lenders, so SBA financing can be a good alternative for those borrowers who are unable to qualify for conventional financing.

The majority of the value of a dental practice is tied to goodwill (e.g. the continuity of the practice and its cash flow stream) rather than tangible collateral (e.g. equipment), which typically accounts for only 20%-30% of the practice value. Dental lenders understand this concept and have the experience and knowledge to evaluate dental practice loan opportunities based upon the cash flow of the practice and the buyer’s experience and skill set rather than focusing on the value of the tangible assets. Local banks typically struggle with dental practice financing (cash flow lending) due to the fact that they are accustomed to making loans which are supported by tangible collateral — such as home or auto loans —where the value of the underlying asset is easily determined and there is an efficient market for selling the asset and recouping any potential loss should the borrower default on the loan. For this reason, local banks are typically unable to provide conventional financing for transactions involving a dental practice.

As discussed in the previous question, tangible assets (equipment, leasehold improvements, etc.) account for only 20%-30% of practice value in most cases. Therefore, the primary collateral for a dental practice loan is goodwill. For this reason, dental practice loans are typically considered riskier and feature a higher interest rate than residential real estate loans, which typically require substantial down payments and are backed by a tangible asset with a widely accepted value and highly active resale market.