How to Finance the Purchase of a Dental Practice

Purchasing a dental practice is an exciting and rewarding career step for many dentists. However, it also comes with significant financial considerations, from securing funding to understanding interest rates and managing buying power. For professionals exploring a dental practice acquisition, securing proper financing is essential to ensure a smooth transition into ownership. This blog post will guide you through the financial aspects of buying a dental practice, including how to navigate lending, what to look for in practice loans, and ways to boost your buying power.

Step 1: Evaluate Your Financial Situation

Before deciding to purchase a practice, it’s important to assess your current financial health. Lenders will take a deep look at your credit score, existing debt, and financial history. Understanding your finances helps you determine your needs and improves how lenders view your financial situation.

Key Financial Metrics Lenders Evaluate:

• Credit score: A strong credit score (700 or higher) can qualify you for lower interest rates.
• Debt-to-income ratio: Lower ratios make you a more attractive candidate for loans.
• Cash reserves: Lenders may require a certain amount of liquidity to ensure you can cover any unexpected costs.

Step 2: Understand Dental Practice Loans

Specialized loans are available for dentists looking to acquire practices or vacant office spaces. These loans differ from traditional business loans because lenders recognize the relatively stable income potential of dental practices. That said, you will still need to research and compare different loan options to find the best terms.

Common Types of Loans:

• Dental Practice Loans: Many lenders provide lending specifically for healthcare professionals. For example, companies like Provide offer customized financial solutions tailored to the unique needs of dental professionals. Long-term financing at competitive interest rates make these loans the first choice for buyers. US Dental partners with lenders to provide buyers with a multitude of bespoke financial products.
• Conventional Business Loans: Offered by banks and financial institutions, these loans may come with shorter repayment periods and higher interest rates than SBA loans. However, they often have a faster approval process.
• SBA Loans: Small Business Administration (SBA) loans are an attractive option because they offer low interest rates and long repayment terms. These loans are partially backed by the government, which lowers the risk for lenders and typically results in more favorable terms for borrowers. The drawback however is that they tend to be more difficult and time consuming to acquire than traditional bank loans, so they are the least popular option.
• Seller Financing: Occasionally the seller of a practice may finance its purchase. Usually they will require higher down payments and shorter repayment periods, resulting in higher monthly payments for the buyer. Seller financing is rarely used, but sometimes the seller may hold a small note secondary to a bank note.

It is smart to get pre-qualified by multiple lenders to compare all the financial options available to you.

Step 3: Compare Interest Rates and Loan Terms

Interest rates play a crucial role in the total cost of acquiring a dental practice. A lower interest rate can significantly reduce your monthly payments and the overall amount you pay over the life of the loan. Shopping around and comparing interest rates across different lenders is essential. Keep in mind that rates are often influenced by:

• Your credit score
• Loan term length
• The loan amount
• Down payment

To get the best rate, consider working with lenders who specialize in dental practice financing, as they understand the specific risks and rewards involved. When you get a quote from Provide or another healthcare-focused lender, they may offer more competitive rates and better loan structures for dental professionals.

Step 4: Boost Your Buying Power

Your buying power refers to how large of a practice you can afford based on your financing options and financial health. To increase your buying power:

• Improve your credit score: Pay off debts and maintain a healthy credit utilization ratio. When you eventually decide to buy a practice, this will help you obtain a lower interest rate, and subsequently lower monthly payments.
• Increase your down payment: A larger down payment can reduce your loan amount, lower interest rates, and make you more attractive to lenders.
• Negotiate the practice price: Work with a broker who specializes in dental practice sales to negotiate a fair price for your purchase. US Dental has over a decade of experience in dental transitions and will never charge you a fee!

Step 5: Prepare for the Lending Process

Once you’ve evaluated your financial health, researched loan options, and boosted your buying power, you’re ready to begin the lending process. When applying for a loan, you’ll need to provide comprehensive documentation to your lender, including:

• Personal and business tax returns
• A business plan outlining the financial projections for the practice
• Purchase agreements for the dental practice you wish to buy
• A list of existing assets and liabilities

Lenders will use this information to evaluate the risk and profitability of your investment. It’s a good idea to work with a financial advisor or consultant to ensure your application is complete and optimized for approval.

Step 6: Post-Purchase Considerations

Once you've secured dental office financing and purchased your practice, it's important to manage your finances carefully. Consider the following tips:

• Budget for unexpected costs: Factor in possible upgrades, repairs, or equipment purchases.
• Refinance if necessary: If interest rates go down or your credit score gets better, think about refinancing your loan. This can help you secure better terms.
• Track your financial performance: Regularly monitor revenue, expenses, and profits to ensure you're on track to meet your financial goals.

Ready to start your business?

Financing the purchase of a dental practice is a significant step in your career as a dentist, and understanding the intricacies of practice loans, interest rates, and lending options will put you on the path to success. Our team is well positioned to guide you through the entire process of buying a practice and providing you financing. Contact us for a free consultation.