Dental finance

Before approaching a bank, surround yourself with a team that can advise, guide and support your strategic vision and goals. 

Accountant

Your accountant will compile, analyze and prepare financial records including advice on tax strategy. They will prepare and file corporate tax returns for your practice and may vet financial statements to analyze an acquisition target. Accountants can also act as a resource to guide you through business growth and advise on the best way to properly structure your business to optimize performance and divestiture.

Lawyer

Your lawyer can assist in preparing and reviewing legal documents such as associate agreements, leases and purchase and sale agreements. You should seek a lawyer’s counsel anytime there’s a legal matter that may expose your practice to undue risk or litigation.

Practice valuator

An experienced dental valuator assesses practices that are coming to the market for divestiture. They can offer an opinion of value on dental practices and guide you through the process of selling or buying.

Banker

An experienced lender understands the dental industry and the unique banking needs of the sector. Whether you are looking at an acquisition, modernization or funding a startup practice, a good commercial banker can offer a critical path forward to address the specific opportunity at hand. They can also provide guidance to complimentary financial solutions such as merchant services, wealth management, personal mortgages and all other forms of credit beyond commercial lending. Once you have your success team lined up, your financial institution will need to know what type of ownership model you are using. Each ownership model has advantages and disadvantages and is something you should consider carefully with counsel from your success team.

Start-up requirements: Business plans

The most important document the bank needs when working towards a start-up practice is your business plan. It should include your market analysis, marketing plan, professional background and managerial experience, and 3-5 years of thorough and justified financial projections. Your business plan should also indicate how much financing you’re seeking from your chosen financial institution.

Projections

Business projections need to be specific to the local market and opportunity. The sales performance they predict should be obtainable, honest and detailed. Projections allow your banker to identify critical signposts when comparing them to historically proven benchmarks of performance and growth in the sector.

Marketing analysis

An in-depth analysis of the market your business operates in will help your banker understand how you will meet sales targets and how you will repay the bank loan. The size of the market, demographics, population density and competitive analysis are all important aspects of a sound market analysis and pivotal for the owner’s understanding and development of a critical path to financial success. The analysis will also provide deeper levels of due diligence to the bank when considering the viability of the project or specific opportunity.

Your background and managerial experience

When a bank considers a new financing opportunity, management is one of the most important variables. A business can have strong financials, an excellent market and cost-efficient vendors, but if management is inexperienced or not present in the business, there’s more risk. It’s important to highlight your experience in management, training, leadership and in the dental field, including accreditations and specialization areas.

Leasehold and equipment financing

A large part of your start-up will require financing for equipment and leasehold improvements. When approaching your banker for financing on these items, you need a plan or quote in place that specifies what resources you’ll need and how much it will cost. Leasehold improvements will also need to be detailed, including all millwork, electrical, plumbing, finishing, and more. Typically, the bank will finance up to 100% of these costs.

Real estate financing

Sometimes an opportunity may arise where a practitioner may purchase the building the clinic occupies. Often, banks can finance up to 100%, so long as affordability is evident. These loans amortize over up to 25 years, with fixed or variable rates available.

Operating financing

To meet the practice’s working capital and day-today operating needs, a line of credit is typically set up. Limits will usually equate to 1.75 times monthly revenues. Operating lines of credit are charged interest, but only on the amounts that are advanced. Interest is applied to the operating line monthly. Repayment is on demand, though excessive usage of the line of credit could be flagged as a concern and an overall lack of cashflow in the practice.

Premises and lease agreement

Location, location, location! Considering the location of your purchase and its lease terms will be an important due diligence item in your acquisition or start-up. The physical building and its conditions are another consideration. What are the conditions of leasehold improvements? Will there soon be additional costs to maintain or update the building? Your loan will typically not exceed the remaining term on a lease. Leases often also have renewal options to extend the term of the lease. In consultation with your legal team, watch out for unattractive conditions such as demolition clauses or non-transferable clauses.

Personal net worth and financial obligations

Personal guarantees are a typical requirement in most dental financings. A guarantee means a practice owner would be willing to support a deal if the practice were financially unable to. That said, the initial risk assessment completed by a banker is meant to ensure business proceeds sufficiently cover the debt advanced. The personal guarantee demonstrates that the owner has faith in the business that it will sufficiently cashflow. An additional aspect of the business financials, in conjunction with obtaining the owner's financial obligations, is making sure that the owner's compensation is sufficient to cover their personal debt obligations.

Credit score

You may wonder why personal credit score is important to your business financing request. When taking a personal guarantee, a personal credit score reflects an individual’s credit worthiness and their overall reliability. Your credit report contains data on all credit products you have personally held, like lines of credit, credit cards, loans and mortgages. It illustrates whether you pay your bills on time, the level of revolving credit utilized and how many times an applicant has applied for credit, amongst other things. It’s important to note that borrowing over 75% on revolving credit products such as a line of credit will negatively impact an individual's credit score. Applying for credit from too many lenders may also have a negative impact. This might indicate that a borrower is credit-seeking and unable to manage finances based on current cashflow.

Security

A common set of security items you will see when being presented with an offer from a banker would include the following: general security agreement — a blanket charge over inventory, equipment, and accounts receivables — assignment of life insurance, personal guarantee from all owners, confirmation of personal income taxes paid up to date and assignment of fire insurance as first loss payee.

Your banking relationship

At minimum, you and your banker should be meeting once a year. A scheduled, formal or informal meeting should occur to discuss how the practice is running, how financials are performing and if you’ve encountered any obstacles. A more thorough review occurs annually, usually with the collection of financial information. This is a terrific opportunity to have an open-ended discussion about how to improve margins, where weak points are and where improvements can be made. Your banker will be your point of contact for account inquiries, authority changes, lending facility increases and anything else bank-related.

Future growth

As your business grows, so may your need for additional financing. You may notice that you need to hire more staff, your equipment needs to be replaced or your existing location is too small for the volume of clients, which all costs money. This should come as no surprise to your banker if they’ve continued to have a wholesome relationship with the practice owner, inclusive of effective communication.