Most dental practice purchases must involve a bank. That can be intimidating — especially if you already have student loan debt.
However, banks exist to lend money. And with a default rate of less than 1%, banks view dental practices as very safe investments. That makes them willing to work with you to write a loan — even if you have student loans. Depending on the practice, many are willing to cover 100% of the purchase price, plus some working capital that gives you cash flow for the first few months.
The process takes time. That’s why you should identify your lender and determine what you need to do to qualify for a loan before you begin searching for the perfect practice! Otherwise, you may wind up scrambling to find financing, only to lose out if the seller decides to work with a more-prepared buyer or you find that you don’t meet the minimum criteria to obtain financing. Talking with lenders ahead of time helps you prepare while demonstrating to sellers that you are serious.
Banks are happy to have informational conversations with potential borrowers. Some will even begin conversations two or three years before a planned purchase. Remember that it’s a two-way street: the bank wants to ensure you are well prepared when the time comes, while you want to make sure that you feel comfortable working with them.
Start the process by talking to at least three different banks.
How do I find a bank?
Look for (at least) three banks that work on dental practice transitions, as they already understand the intricacies of the process. Ask colleagues who have recently purchased about their experiences and whether they would recommend their lender.
You can begin with ADA partner BMO Harris, who offers preferred rates to ADA members and practice financing resources.
If you are considering a small (rural or small-town) market, be sure to talk to a local bank, as well. Many will work hard to get you a loan that keeps a dentist in town.
What should I ask?
As you interview banks, look for bankers who take the time to listen to your concerns and answer your questions. Does the banker understand your plans, or do you feel like an anonymous number?
Make sure you ask:
- How their lending process works: who’s involved, how long it takes, what documentation you’ll need
- What rate they can offer: while the exact rate will almost certainly change before your purchase, you can use the information to understand how the banks generally compare
- How much you might qualify for: taking into account your credit score, other debts, income, and lifestyle
- What you can do to strengthen your application: such as improving your credit or paying down debt
You should also ask if they have a team they work with, should you require legal or accounting assistance.
Why three banks?
Talking to three or more banks will familiarize you with the process while also helping you find a competitive rate. The first bank you speak with might be perfect — but until you talk to another, you won’t have the context to understand how they stack up.
Plus, building relationships with multiple bankers now can help you down the road. If your preferred bank suddenly can’t write your loan, you’ll have another in your back pocket rather than struggling to find an alternate source of funding.
Can’t I just use my existing bank?
If you have a long-standing relationship with a bank for your personal checking or mortgage — go ahead and ask if they do dental practice lending! However, if they lack a track record of working with dental practices, they may struggle to understand the intricacies of the business. That leads to a higher likelihood of a denied loan or a bad experience. After all, you’re probably still learning the business side of how a practice operates. You don’t want to try to educate a banker about it during an already stressful time.
Plus, a less experienced bank is more likely to need to work with the Small Business Administration (SBA) rather than keeping the loan in house. This can add lots of additional red tape while making the terms less flexible. Be sure to ask if the bank will be handling the loan itself or relying on the SBA.
What happens after I find a bank I like?
Congrats! Once you have identified a few banks that seem like a good fit, stay in touch with them as you go through the process and begin searching for a practice.
If they recommended that you make any changes (such as cleaning up your credit) periodically update them on your progress. You should also reach out to them if your plans begin to change, such as considering a practice that's substantially different from your original idea.
Then begin building the rest of your practice transition team. Again, this is much easier before you’re under pressure to move quickly to snag that must-have practice!
If you’re thinking about buying a practice, start by interviewing your banks — and by joining ADA Practice Transitions. When you create your free account, you get access to additional resources to help you prepare for your purchase.