A financing option for dentists comes in handy for dentists in case an associate is to become an owner of a dental practice, a business owner buys out the other, or an experienced dentist plans to prepare for retirement. Apart from the selling price, working capital, equipment, property, and costs involved in the transition will have to be covered by funds. Financing a dental practice requires proper coordination between the lender and the buyer since the ability to finance the purchase will depend on the buyer’s financial status and the performance of the practice itself. Proper planning of the financing scheme helps ensure continued services for the patients of the new owner and also increases the likelihood of closing the deal on time.
Practice Ownership Transition Financing Options
There are various funding options available to facilitate smooth transitions in various dental practices. Let’s look into some of these options:
1. Practice Acquisition Loans
Acquisition loans serve as the main source of finance for a dentist buying a dental practice. The method could include eligible expenses relating to the acquisition process and, at times, could consist of additional working capital, depending on the lending institution and terms of the deal. Established practices may be interesting to lending institutions in that they already possess patients, a track record, employees, and systems to generate future cash flows. According to ADA (American Dental Association), most of the practice acquisitions are done through lenders, and hence it is advisable to talk to several banks prior to initiating the application process for a financing option for dentists.
2. Seller Financing
Seller financing enables the retiring dentist to finance a portion of the deal rather than having the buyer source all the cash needed through traditional financing from an outside lender. Payments are made by the buyer to the seller based on a promissory note agreement. Seller financing could be used in cases where the lender and the buyer cannot reach an agreement on the total funding plan or if the two parties desire to have more flexibility with regard to the ownership transfer process. This type of financing option for dentists not only reduces the funding challenge but also improves the ownership transition process.
3. SBA 7(a) Financing
A 7(a) loan from the SBA can finance eligible small businesses based on a variety of acceptable business purposes, which include machinery and equipment, working capital, real estate, and change in ownership. Currently, the SBA has a maximum 7(a) loan limit of $5 million. This ability may be useful when the transition includes things beyond just the dental practice itself, such as improvements to the facilities or increased working capital. In this regard, a business loan for dental practice can be a component of an overall transition plan if all conditions have been met by the SBA and lender. This dentistry loan ensures that liquidity is preserved following the transition.
4. Specialty Dental Practice Loans
Dental specialty lenders pay close attention to the financing needs of the health care field and do not treat all small businesses identically. They might consider collections, production, retention of patients, overhead, prior indebtedness, and the involvement of the seller in the transfer of the practice. The ADA recommends various types of practice financing for dentists at each stage of their practice and asks dentists to consider the financing offered by the lenders carefully. For a dentist who is entering a transition process with certain professional objectives, the financing option for dentists becomes particularly useful.
5. Practice Equity and Credit Lines
A practice also needs funding besides its acquisition financing, especially in situations where an acquisition is followed by an immediate improvement. A line of credit provides funds on a revolving basis for working capital purposes, and the practice equity financing may fund any qualifying improvement or equipment purchase. The ADA observes that dentists may utilize a small line of credit for their working capital purposes and separately finance their equipment purchase, expansion, or real estate. For dentists as potential borrowers, extra credit provides financing flexibility besides the acquisition financing for the purpose of ownership acquisition.
How To Select the Right Financing Option
A financing option for dentists that will suit the dental practice depends on the nature of the transfer of ownership, the terms of the purchase, the cash flow of the practice, and the financial position of the buyer. For a full purchase, the dentist may need to use an acquisition loan. However, in case of a phased transfer of business or partner acquisition, a combination of financing sources may be required. The dentist is supposed to consider the value of the practice, obligations, projected cash flow, working capital, and property included in the transaction. Comparing aspects like repayment duration, interest cost, amount of collateral, charges, prepayment options, and future borrowing ability will be helpful in deciding which one is more favorable and sustainable.
Final Thoughts
Proper planning during the transition process of the dental practice allows maintaining its value and ensuring the smooth entry of the new owner into the business. In this regard, acquisition loans, seller financing, SBA 7(a) loans, specialized lenders, and additional financing sources may play their roles in meeting the requirements of the particular transition process. The most suitable structure of financing depends on the type of transition, the state of the finances of the practice, the buyer’s qualifications, and the future cash flow of the practice after the closing. Ultimately, the appropriate form of financing option for dentists is likely to ensure that both the buyer and seller get a sustainable transition process.
