What Do Lenders Look for When Financing a Dental Practice?
When a dentist applies for financing, lenders generally evaluate both the borrower and the proposed transaction. The goal is to understand the financial strength of the dentist, the practice, and the ability of the business to support the requested financing.
For dentists considering dental practice financing, understanding what lenders may evaluate can help borrowers prepare before submitting an application.
Cash Flow and Debt Service
For an established dental practice, cash flow can be one of the most important considerations.
Lenders may examine whether the practice generates enough cash flow to cover normal operating expenses and the proposed debt payments.
A practice with consistent cash flow can provide lenders with greater insight into its ability to support financing.
Historical Financial Performance
Lenders may review several years of financial information rather than relying on a single period.
Revenue trends, profitability, operating expenses, and other financial information can help demonstrate how the practice has performed over time.
The Dentist’s Professional Experience
Professional experience can also be relevant, particularly when financing a new practice or acquisition.
A dentist’s education, licensing, clinical experience, management background, and previous ownership experience can help lenders understand the borrower’s ability to operate the business.
Credit History
Credit history can provide information about how the dentist has managed financial obligations.
Lenders may consider payment history, outstanding debt, recent credit activity, and other aspects of the credit profile.
Credit is important, but it is generally considered alongside the rest of the application.
Existing Debt
A dentist may already have student loans, mortgages, business loans, equipment financing, or other obligations.
Lenders can consider the borrower’s existing debt when evaluating overall repayment capacity.
The presence of existing debt does not automatically prevent a dentist from obtaining financing.
Liquidity and Available Assets
Lenders may also review available cash and other liquid assets.
Liquidity can demonstrate the borrower’s ability to handle unexpected expenses and may provide additional financial flexibility during an acquisition or startup.
The Practice Being Purchased
For an acquisition, lenders may evaluate the actual dental practice being purchased.
Important considerations can include:
- Revenue
- Profitability
- Cash flow
- Patient volume
- Operating expenses
- Equipment
- Location
The quality and financial performance of the target practice can have a major influence on the financing analysis.
Purchase Price and Transaction Structure
The amount being paid for the practice is another important consideration.
Lenders may review the purchase price in relation to the practice’s financial performance and the overall structure of the transaction.
A clearly defined purchase agreement can help establish what is being acquired and what the financing will be used for.
Business Plan and Projections
A detailed business plan can be particularly important for startups and practices undergoing significant changes.
Financial projections should explain expected revenue, expenses, staffing, marketing, and other major assumptions.
Projections should be realistic and supported by reasonable expectations for the practice.
Collateral When Applicable
Depending on the financing program and lender, collateral may be considered as part of the overall credit analysis.
The specific collateral requirements can vary significantly between financing programs and transactions.
Use of Funds
Lenders will generally want to understand how the financing will be used.
A dentist may be seeking capital for an acquisition, equipment, real estate, renovations, working capital, or a combination of eligible expenses.
Clearly identifying the intended use of funds can help establish the overall financing need.
Final Thought
Lenders may consider many factors when financing a dental practice, including cash flow, historical financial performance, credit history, existing debt, liquidity, professional experience, purchase price, and the strength of the proposed transaction.
Dentists can improve their preparation by organizing financial records, understanding the practice’s financial performance, developing realistic projections, and determining exactly how much capital the transaction requires.
