November 21, 2022

Young Dentists – 3 Steps to Prepare for Financing a Dental Practice

By Patrick Shaw, MBA, Regional Director of Practice Finance at Provide
Provide is the industry’s only digital finance company – Provide financially empowers healthcare providers to achieve their practice ownership dreams.

For the last 10 years I’ve helped dentists get financing to buy their own practice. If you’re a young dentist who aspires to own a practice, here are the three most important things you can do get the financing you need to become a practice owner.

I. Focus on your credit profile and build a good credit score

Your credit score matters but it’s not the only thing the bank looks at. Within your credit profile, your bank will evaluate the following five components.

  • Available credit – Banks like it when you don’t owe more than 30% of your credit limit. If you have a credit card with a $10K limit, don’t let the balance exceed $3K.
  • Type of debt – There are four main categories of debt and banks want to know what type you have. If you buy a car, that’s an installment loan, which is secured debt. Credit card debt is unsecured. If you have a line of credit at a bank, that’s a revolving account, and the last category of debt is a mortgage.
  • Payment history – Do you pay on time? Late payments are 30 + days past due date.
  • Length of credit history – If you got your first credit card last week, you won’t have a history to evaluate, so it’s better to start early. Get a card while you’re a student. Even if it’s a joint account with your parents, you’ll need it to build a history.
  • Number of inquires – Every time you apply for a credit card, the finance company needs to look at your credit score and there is a record of each inquiry. The bank will see this record. The more inquires there are, the worse off you look. Banks assume that someone who applies for lots of credit cards has sloppy credit, so don’t try to get a credit card for each store where you shop. It’s better to just have one or two credit cards.

II. Keep track of your production capabilities

It’s important to get experience before you buy a practice and banks will want to know about your experience. You should plan on providing them with documentation about your production capabilities. Not every practice keeps good track of this information, and some practices might not be willing to share it with you, so this should be one of the factors you weigh when deciding where to work after graduating. When you’re interviewing for jobs, be sure to ask if you will be able to keep track of production. You should also find out how busy the office is. The whole idea is to get experience quickly and one of your goals is to show an increase in production, which is difficult to do if business is slow. If you get a job at a practice where they refer out procedures you want to learn, that’s not going to help you, either.

When banks look at your documented production capabilities, they want to know what experience you have and how it matches up with the practice you want to buy. They’ll want to see things like the number of days worked per week, the types of procedure you can do and if you are working to expand your capabilities. If you currently can do crowns, bridges, and extractions, can you work up to implants? How much has your production increased over time? Bottom line, the bank wants to be sure the practice you’re looking at is a good match for your abilities and experience.

III. Clean up your personal finance

Banks like liquidity, so be sure to have a good nest egg when you go to apply for a loan. In other words, be a saver. The most common mistake I see is newly graduated dentists adopting an expensive lifestyle and not saving enough. The truth is, it’s human nature – after all those years of hard work and studying, you graduate and get a good-paying job and want to enjoy it by spending on things like a new car, nice vacations, a big house. But if your goal is to own a practice, you need to stick to a plan and save money each month. A good rule of thumb is to have 5-10% of the loan amount on hand, and retirement savings will count. If you’re buying a practice of $1M, you should have $50-100K in the bank. We’re talking about liquidity, not a down payment. To accrue savings, it’s okay to make your required minimum student loan payments in order to build up your cash reserves. Banks don’t have a problem with that, and you shouldn’t either. Once you have cash flow from the practice, you’ll make faster progress paying back the loans.

Investing in dentists is good business for banks, you just need to make it easier for them. If you have questions about what you can do prepare, contact Engage Advisors. We partner with banks regularly and they have extensive experience. When you’re ready, Engage Advisors can help you put a team together and guide you through the process.

Provide, Inc. is a wholly owned subsidiary of Fifth Third Bank, National Association. All opinions expressed by the Provide employee participant are solely their current opinions and do not reflect the opinions of Provide, its affiliates, or Fifth Third Bank. The Provide employee participant’s opinions are based on information they consider reliable, but neither Provide, its affiliates nor Fifth Third Bank warrant its completeness or accuracy and should not be relied upon as such. This content is for informational purposes and does not constitute the rendering of legal, accounting, tax, or investment advice, or other professional services by Provide or any of its affiliates. Please consult with appropriate professionals related to your individual circumstances. All lending is subject to review and approval.