In this episode...

The paramount focus of this podcast episode is the critical importance of cultivating a robust banking relationship for dental professionals, one that extends beyond mere transactional interactions. We delve into the nuances of dental-specific lending, the distinct differences between lenders who understand the unique financial dynamics of dental practices and general banks that do not. It is imperative for physicians to comprehend the ramifications of their banking decisions, as these choices can significantly influence their practice's growth trajectory, particularly during challenging periods or transitions. Throughout our discussion, we describe various types of loans relevant to dentists, including acquisition loans, startup loans, and lines of credit, while emphasizing the importance of proactive communication and strategic planning to establish a fruitful partnership with a lender. Ultimately, we aim to equip our listeners with the knowledge to navigate the complexities of dental financing, thereby ensuring a sustainable and prosperous practice.

I want to ask you something, doctors.

When's the last time that you really sat down and thought about your banking relationship?

Not just your loan balance, but the actual relationship, who your banker is, whether they understand what you do, whether they could explain the difference between a startup loan and an acquisition loan without fumbling.

Most of the time when we talk to doctors, the honest answer is they haven't.

They got their loan, they made their payments and that was that.

And I get it, you went to dental school, you didn't go to banking school.

Your job is to treat patients and run a practice.

So the idea of understanding dental specific lending, lines of credit, interest structures, debt service coverage, it sounds like someone else's problem.

But here's the thing.

Your banking decision will follow you for decades.

The loan that you took to buy your first practice, the line of credit you did or didn't open before you needed it, the relationship you built or you didn't build with your lender, well, all of that has a direct impact on your ability to grow to whether tough months, the ultimately to do a transition out of your practice on your terms.

So today we're going to break it down.

We're going to talk about the types of loans doctors need to know the difference between dental specific lenders and general banks.

How lines of credit work and when to open one, and maybe most importantly, when.

A great banking relationship, I should say what a great banking relationship actually looks like and how to build it.

I'm Phil Cole with Clas Solutions.

We work with dentists every day on practice transitions, acquisitions startups and practice management.

The banking comes up in almost every single one of those conversations.

So let's get into it.

First thing I want to address is why this topic even needs its own episode.

Why can't you just walk into any local bank, explain that you're a dentist and get a loan?

Why does it matter who you work with?

Well, the short answer is general banks don't understand dental lending the way that dental specific lenders do.

And I know that sounds like a marketing slogan, but there's real substance behind it.

Let me explain what I mean.

When a general bank underwrites a loan, they're looking at just standard metrics.

Your personal credit score, your income, your assets and liabilities, and.

And that's pretty much it.

But they don't know how to read a practice's production schedule.

They don't understand the difference between fee for service practice and a heavy PPO practice or a Medicaid clinic, or why that matters for cash flow.

They don't understand hygiene, recare rates or overhead as a percentage of collections or what a healthy number looks like for dental practice specifically.

Instead, they're going to wrap you into just general businesses.

So when you walk in with a 65% overhead ratio, a general banker might flag that as a concern.

But a dental specific lender knows that in a fee for service practice, 65% can be totally acceptable.

And they'll look at the production trends, the active patient count, the payer mix, to get a real picture of what that practice's health really looks like.

Now here's where it gets even more specific.

Different dental lenders have different appetites for different types of loans.

This is something we tell doctors all the time and it's something a lot of them don't know going in.

There are banks out there that will do acquisition loans, meaning you are buying an existing practice, but they won't do startups.

Building a practice from the ground up is a different risk profile and so not every lender will touch it.

So if you walk into a dental specific lender to finance a de novo startup and they're not a startup lender, you might get a yes, but or even worse, a soft no that drags on for weeks before you find out that they don't have the appetite for that product.

Or it's not something that they're even ready to try, but maybe you'll be the first one that they'll try it on.

We've seen this happen.

It costs doctors time and it definitely costs momentum.

The lenders I'd point doctors towards, and I'm not trying to say this as an exhaustive list, but they include places like Panacea Financial, PNC Healthcare, bank of America, Practice Solutions and bmo.

These are just lenders who live in the dental space.

Their loan officers have seen hundreds of dental deals.

They know what good looks like, they know what red flags look like.

And they're structured to deal based on the realities of a dental practice cash flow and not some generic small business model that doesn't even pertain to the healthcare or dental world.

I would also say even with dental specific lenders, do your homework.

Don't just take the first offer.

The terms matter, the rates matter, but the relationship and the flexibility of that.

Lenders matter just as much, if not, in my opinion, sometimes much, much more.

And so we'll come back to that.

One thing I want to address here, and this is something that doesn't get talked about enough, I feel, is the concept of a goodwill loan.

In most Industries.

If you're buying a business, the lender wants hard collateral.

So when we say hard collateral, we're looking at equipment, the real estate and all the inventory.

But when you're buying a dental practice, a huge portion of the value is the patient base, which is considered goodwill.

General banks have a hard time underwriting that.

Dental specific lenders understand it and will often lend against it.

That's why when we help doctors go through the process of acquiring a practice, one of the first things we're asking is, do you have a dental specific lender lined up?

And we get the answer all the time.

Why is that important?

And that is because if you don't, you're going to run into problems.

Okay, so let's talk about the actual loan types you're going to encounter as a dentist.

Because I find that a lot of doctors have a general sense of I need a loan to buy a practice, but they don't fully understand what they're getting into or what options actually exist out there.

I mean, the first and most common is of course, what we've already discussed a little bit or mentioned and that is the practice acquisition loan.

This is exactly what it sounds like.

That is you're buying an existing practice.

The loan is typically structured based on the purchase price, which is usually in some cases brokers out there or evaluators will say it's a multiple of the practices ebitda.

But really what banks look at is it comes down to is the percentage of its annual collections.

Most dental acquisitions are going to come in somewhere between a 60 and 80% of annual collections as a purchase price.

Though that varies depending on the practice.

It of course varies depending on the market and of course the deal structure.

What is the loan cover?

Well, it covers the purchase price of the practice, the patient base, the goodwill, the equipment, the supplies.

And in many cases you can also roll in working capital to cover the first few months of operations while you're getting your feet underneath you.

And in the case of the dental world, getting your credentialing loan terms on practice acquisitions are typically 10 years.

Fifteen is not uncommon either.

Interest rates vary with the market.

But dental specific lenders have historically been competitive because they know their default rates in this space are very low.

Dentists pay their loans back.

There's a known quantity of this.

In fact, the national average is less than 1%.

The second type is the startup, or what we use the term de novo loan.

It's you building a practice from scratch.

This is a different product.

Now, it's generally considered higher risk than an acquisition loan because there's no existing patient base, no existing revenue history.

You're essentially betting on your ability to build the practice.

Now that doesn't mean it can't be done because we're doing a ton of them.

We see doctors do it successfully all the time.

But you need to be talking to a lender who has a startup appetite and you need to have a solid business plan.

We're talking demographic analysis, a marketing plan, your estimated cost to build out the space, your equipment list your projected revenue for years one through three.

We go through years one through five.

And the more detailed and the more credibly you bring, what more you bring to that conversation, the better position you're going to sit.

Startup loans often have a higher interest rate than acquisition loans and they may have a longer repayment term to account for the ramp up period.

Some lenders also offer deferred payment periods for startups, meaning you're not making principal payments for the first six.

Most of them right now are 12 months while you're building your patient base, which is an excellent understanding once again of those banks knowing you need that ramp up time.

So that is definitely critical for cash flow in year one.

And the third type of loan is the equipment loan.

This is separate from your practice loan.

This is chairs, your digital X ray units, CBCT scanners, your Cerex systems.

All of this equipment can be financed separately, usually on a five to seven year term.

I'd even go there's ones out there that will do 36 months.

You can bundle equipment financing into your practice acquisition loan in some cases, or you can handle it separately.

Both approaches have merit, depending on your situation.

I would say, and this is, I don't know, I guess a pet peeve of ours.

Don't finance equipment that you don't have a plan to use profitably.

I've talked to Doctors who finance $120,000 CBCT until unit and because the sales rep made a compelling case and then two years later it's sitting in the corner barely being used.

No noticing that full mouths are the most X rayed series there is.

Equipment debt is still debt.

It has to generate a return on investment.

And then the fourth type is real estate.

This is separate from practice financing, but often comes up in the same conversations, especially when you're buying a practice that owns its own building.

In that case, you may be looking at commercial real estate loan on top of the practice acquisition loan.

The terms and underwriting are different.

Real estate loans are typically longer 15 to 25 years and the collateral is the property itself.

Some doctors prefer to buy real estate when they can because it's a long term asset that builds equity.

Others prefer to lease or keep their capital in the practice.

I'm not going to tell you which is right for your situation.

That depends on a lot of factors.

But I will say that if you are buying a practice that includes real estate, make sure you have a lender who can handle both pieces.

And make sure you understand what the combined debt services looks like and whether your projected cash flow can support it.

A quick word on loan terms.

You need to understand debt service coverage ratio that a lot of times comes up as dscr.

This is the number lenders use to evaluate whether your practice generates enough cash flow to cover your loan payments.

A DSCR of 1.0 means your income exactly covers your debt.

Most lenders want to see at least 1.25, meaning your income is 25% above your debt obligations.

Understanding where you are on this metric before you approach a lender is going to be important.

We at class will help you in providing whether or not what your percentage is for that dscr.

Personal guarantee well, almost every dental loan is going to require a personal guarantee.

That means you personally are on the hook if the practice defaults.

This isn't optional, it's kind of standard in the industry.

Some banks are getting away from that, so don't be surprised by it.

But down payment.

Some dental lenders will finance 100% of the practice acquisition, meaning no down payment is required.

Most are doing this, and this is actually fairly unique to the dental health care lending space.

It's not going to be with your local normal banks.

General business loans almost always require a down payment.

And if the lender tells you that they need 10 to 20% down on a dental practice acquisition, it might be worth shopping around.

In fact, I know it is.

So let's talk about lines of credit, because this is something that I think is genuinely underutilized by dental practices.

A line of credit is different from a term loan.

A term loan, like your practice acquisition loan, gives you a lump sum that you repay over a fixed period on a fixed schedule.

A line of credit is revolving.

You have an approved credit limit.

You draw from it when you need to and then you pay it back and the capacity is then just restored.

Think of it like a business credit card, but with significantly better rates and limits.

Now why does a dental practice need a line of credit?

Let me give you a few scenarios.

Your sterilization unit fails on a Monday morning, you've got a full schedule, patients are coming in and you need to replace that unit fast.

That's not a planned expense.

That's what we call an emergency.

If you don't have a line of credit, you're either pulling it on that high interest credit card, liquidating savings, or I hope not, but delaying the fix.

A line of credit lets you handle it quickly and pay it back over time at a reasonable rate.

If you can pay it all off at once, then great.

No different than a credit card.

Second scenario, let's just say that you have a slow month.

Every practice has them.

The holidays hit, a lot of your patients are out of town, insurance processing is delayed.

Your collections dip for 30 to 60 days.

Your payroll doesn't dip, your rent doesn't dip.

A line of credit bridges that gap without touching your personal savings.

Third scenario, I would say opportunity.

You find out a neighboring practice is looking to sell, you want to move on it quickly.

Having a line of credit available gives you the flexibility while you arrange more permanent financing.

Speeds matter in those situations.

So here's the critical piece that, that I tell every doctor we work with.

Open your line of credit before you need it.

Banks do not like to give you money when you're desperate.

They like to give you money when their things are going well and you don't need it.

So open your line of credit when your practice is healthy, when you have strong collections, your overhead is in a good place and you can show the bank a track record of stability.

Do not wait until you're in a crash, a cash crunch, excuse me, and then try to open one.

By that point, you may not qualify or the process will take too long to help you.

How big should your line of credit be?

Well, I would say as a general rule, you want to have access to somewhere between two and three months of operating expenses.

If your monthly overhead, payroll, rent, supplies, let's say lab fees, everything runs, let's say around $80,000.

Then I would try to get a line of credit for 160 to 240,000.

That gives you enough Runway to handle a real disruption without, I should say pain, without having to make a panic decision.

The interest rate on a line of credit will typically be a variable and tied to the prime rate.

Unlike your practice acquisition loan, which is usually fixed rate.

Line of credits move with the market, so that's important to understand going on.

When rates are low, they're very affordable.

When rates are high, as we've seen in recent years, they can get expensive to carry A balance on.

So use the line of credits strategically.

I would say use it, pay it down.

Don't just let it sit at its max balance and pay that interest.

One more thing, your line of credit is also a relationship signal to your bank.

A well managed line of credit, meaning that you use it and pay it back consistently and responsibly, shows your bank that you are healthy and that you are one heck of a compatible and capable borrower.

It strengthens your relationship and makes future financing easy to access.

So, okay, now we get to what I think is the most unappreciated piece of this entire conversation and that's the relationship itself.

I have talked to a lot of doctors who view their banker the way they view their Internet provider.

You sign a contract, you make your payments and the only time you hear from each other is when something goes wrong.

And honestly, I can understand it when things are going fine, why would you reach out?

But the doctors who handle transitions, growth and challenges the best, they have a completely different relationship with their bank.

They have a banker who knows them, who understands their practice, who they can call with a question and get a real answer from.

So how do you build that?

Well, I would say step one is definitely choose the white banker, not just the one that sounds right or not the one that sounds obvious.

The institution matters as well.

Dental specific lenders are better positioned to serve you, but the individual loan officer matters even more.

You want someone who has been in dental lending long enough to understand what you're dealing with.

Someone who can advocate for you internally when you need a decision made.

I would say interview your banker before you commit.

Ask him, you know, how many dental loans have you closed?

What types of acquisitions, startups and equipment have you done?

What's your timeline?

When it comes to me getting a decision or a term sheet, that's a big one.

What happens if something changes in my practice and I need to restructure?

How do I get in touch with you when something comes up?

A good banker is not going to be offended by those questions.

A banker who is offended by those questions, I'm going to tell you right now, you should be running away from.

But instead a good banker is going to acknowledge that and give you tremendous answers that you are going to feel comfortable with.

Step two is communicate proactively.

Don't go silent when things are hard.

I know that feels counterintuitive, but nobody wants to call their banker to say, hey, it's been a rough quarter.

But I promise you, proactive communication builds trust and it shows Maturity and it shows a business sense.

Lenders are not naive.

They know practices have ups and downs.

What they don't want is to get a surprise given to them.

If you have a slow few months, if you have a major unexpected expense, if you're going through a staffing transition, keep your banker in the loop.

A brief call or email that says, hey, I just want to flag you on this, here's how I'm addressing it, is worth a tremendous amount of goodwill.

Compare that to a doctor who goes dark for six months.

I'll even say six years and then calls because they've missed a payment.

That's a very different conversation.

And step three, be a complete borrower.

What do I mean by that?

Your bank is not just a place to get a loan.

You want your operating accounts, your business checking, your merchant processing, your business savings.

When you consolidate your banking relationship, you become more valuable customer and more valuable customers get better service, faster decisions, and definitely way more flexibility.

I'm not saying you have to give any single bank all of your business, but if you have your loan with a dental specific lender, you're operating an account with a random local bank and your payroll processing with a third institution.

You're fragmented.

Consolidating creates leverage for you.

Step four, build a team around the banker.

Your banker is one of the one piece of a larger financial advisory team.

We talk about a financial advisory team all the time.

They work alongside your accountant, your financial planner, us as your practice consultant at, or at least they should.

I would say the best financial outcomes we see for doctors are when these people are communicating.

When you're CPA and your banker are on the same page about your debt strategy, your compensation structure, or maybe your tax situation, that doesn't happen automatically.

You have to initiate those connections.

Introduce your banker to your cpa, make sure they have each other's contact information.

When you're planning something significant, buying a second location, maybe bringing in an associate, maybe doing a major renovation, bring both of them into the conversation.

And you should be bringing your whole advisory team into that conversation.

In step five, think about the long game.

The banking relationship you build in the early years of your practice is going to matter when you're ready to transition, when you're looking to sell, when you're looking for a buyer, when you need bridge financing.

Having an established relationship with a lender who knows your practice history is a genuine advantage.

We see it all the time in transitions.

A doctor who has been with a dental specific lender for 15 years, who has a clean Repayment history and a strong relationship with that doctor has options, they get calls back and they get solutions.

A doctor who has been moving around and never build a consistent relationship.

They're starting from scratch every single time.

And starting from scratch when you're under time pressure is just not a fun place to be.

Trust me.

Let me bring this home now with some practical steps you can take right now.

Number one, if you're a practice, a pre acquisition, I should say, get your banking team in place now.

Don't wait until you found a practice and you're under a letter of intent.

I see this all the time.

You know I'm under a letter of intent, but I haven't talked to a bank yet.

And then start shopping for that lender at that time.

This will slow you down and cost you deals.

Reach out at least two or three dental specific lenders that have the initial conversations.

Understand what they can offer and know who your loan officer is going to be before you need them.

Number two, if you own a practice and you don't have a line of Credit, go open 1.

Call your bank this week, not when you need it now.

While things are good, your future self will thank you someday.

And number three, review your current loan terms.

When did you last look at your rate, your term, your remaining balance?

Are there opportunities to refinance at better terms?

Have you had a conversation with your lender about your current situation and where you're headed?

If not, schedule that conversation.

And number four, evaluate your banking relationship honestly.

Do you have a dedicated banker who knows your practice?

Do you know how to reach them?

When's the last time you actually spoke?

If your banking relationship consists entirely of auto pay and a monthly statement, well, I'm just going to say it might be worth having a conversation about whether they're serving you well.

Number five, and I think this is the most important one, and we say it all the time, but get your advisory team aligned.

And if you don't have an advisory team, reach out to us at class.

Let us help you get the right people in place.

We've been working with great advisories for years.

Make sure your banker, your cpa, your practice consultant, whoever it is, your builder are all connected.

That one conversation can save you an enormous amount of pain down the road.

Well, that's going to wrap it up for us today.

Banking isn't the most glamorous part of owning a practice, but it might be one of the most consequential.

The doctors who take it seriously early are the ones who have real options.

Later.

I would say if any of this raised questions about your specific situation, whether it's a loan structure, line of credit, or just getting a second opinion on where things stand, well, once again, the offer is here.

Reach out to us at Class Solutions.

We work with doctors at every stage, and these conversations are exactly what we do.

So thanks for listening to this episode.

We'll see you on the next episode.