Are you looking to Build, Grow or Purchase your Practice?

Often, banking peers will express their desire to do dental lending, which is known to be an industry with a low default rate.  They then, analyze a deal and quickly move back to their specific comfort zones as they begin to remember that Dental lending is highly specialized and only a few banks in the local MN market do the majority of this lending.

To be a top banking lender in the dentistry profession, you need to be comfortable with securing the loan predominantly with the value given to the dental practice.  The practice is effectively a nominal amount of equipment (relative to the practice value), the patient records, and dovetailing from the patient records, a cash flow stream.  A bank that is effective in this space will typically need to lend up to some percentage of the value of the practice.  Each bank will have a different model to some degree for valuation, but most will be determined from a 3-year Weighted Revenue model.  Now, there will always be a double-check that includes direction of revenues, as well as the multiple of EBITDA that this equates to.

In summary, you need to be more of a cash flow lender than a collateral lender to be successful in the Dental space, as your risk of loss in the event of default, in most cases will be on the higher end.

Thus this creates a challenge for many banks, as many are more comfortable with collateral lending than cash flow based lending.  If a loan that is secured by patient records and some equipment defaults during the term of the loan, then most times, there is not a lot of tangible collateral to liquidate relative to the debt.  This is because, in MN, a bank cannot directly own patient records, but can liquidate whatever equipment value is present.  This would typically lead to a significant loss if the dentist that defaulted were not cooperative in selling its practice when it began to experience difficulties. However, banks like 21st Century Bank finance a majority of its Dental Practices through Conventional Loans as opposed to utilizing the SBA financing programs used for many other collateral shortfalls.  Why?  Consistency of Cash flow stream which leads to low default rates.  The consistency can be best answered by considering how often one switches dentists and what precipitated that move.  Risk of loss doesn’t come into play when loans don’t default.

In this dental space, we find that we compete with two other community banks often that finance practices similar to the way that 21st does and 3-5 very large banks that offer specific, rigid programs that sometimes work very well and other times are not that favorable to the Dental practice.

That would be the recommendation to Dentist’s when going through the process of attaining financing—finding one of the three community banks that primarily do the lending in the metro area of MN in the dental space and one larger bank programs to determine what their best option will be. In most cases you’ll find a larger bank will typically have a set program that has much rigidity, as opposed to a community bank that has had experience in the industry, one that can give you an ala-carte choice of a full menu of loan products.