Where does Dental financing fit within the lending spectrum?

Where does Dental financing fit within the lending spectrum?

May 01, 2018

Dental Financing/Practice Loans

Dental financing fits into the category of Owner Occupied Lending and is a subcategory of the Medical Professional arm of Owner Occupied Lending.

As a skilled dental professional, you understand your craft and have both the knowledge and skills to provide quality care to your patients. As you begin your career or if you are ready to expand your dental practice, be sure to fully understand your options, by knowing up front what programs are right for you.

Within the Medical Professional arm are five main types of businesses that Community Banks will typically have opportunities with which to lend:

1)    Dental: Both General Dentistry and Specialty Dentistry
2)    Optometrist
3)    Podiatrist
4)    Chiropractic
5)    Pediatrics

Beyond this, the other medical arms typically operate under the umbrella of a large hospital unit, which is not a target at least in the Community Banking world.

Each one of the above types has certain nuances to financing them—but the focus of this article will be on Dental practice.

The Challenge to Dental Financing for many Banks—or stated differently, what makes this type of lending specialized?

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.

What are the typical Conventional Loan financing arrangements?

  • The Borrower will be the entity that owns the practice
  • The Loan Amount will typically be up to 70 % of the Internally Valued Dental Practice by 21st Century Bank
  • The Loan Term will be for up to 10 years— fully amortized over this term
  • The entity will be offered 5-year, 7-year, and 10- year fixed loan rates
  • The Collateral will be a UCC-1 that is filed on All Business Assets of the Practice; a Personal Guarantee from the Owner(s); and a Life Insurance Policy that is assigned to the bank given the key man nature of this business and the lack of value of tangible collateral relative to the loan amount

What are the various loan purposes requested in the Dental Segment?

•    Acquisition (First Time Buyer):  This type of financing will be conventional financing 75 % of the time at 21st Century Bank and the other 25 % of the time is financed with the support of an SBA 7a guarantee.  This decision is usually dependent upon the amount of Student Debt; Cash Saved, Personal Income Requirement to pay personal life, etc.

•    Start-Up (First Practice):  This financing is usually best done by a large bank.  They offer programs for these type of scenarios; 15-year amortizations, increasing payments as the practice seasons, etc.

21st Century Bank usually refinances many of these loans for practices when they are three years into this term as then the cash flow stream is seasoned, and they can take advantage of more advantageous terms.

•    Start-Up/Practice Expansion (Owns other Practices):  Usually the current practice has significant equity in it, and thus, most are financed with Conventional Loan products, the terms of which are outlined above.

•    Acquisition (Owns other Practices):  This is most often a Conventional Loan product.

•    Practice Buy-In (First Time Buyer):  This is most often a Conventional Loan product, and the Dentist buying into the practice serves as the Borrower under the loan and a priority Security Interest in the Practice is pledged as Collateral to secure the loan.

•    Refinance:  Predominantly, this occurs for a practice that is in its early stages.  They utilized a large bank’s flexible cash flow product for start-up, and they convert to a Conventional Loan with 21st Century Bank to take advantage of the lesser cost terms.

Who is 21st Century Bank’s Dental Specialist?

Blair Oklobzija, Head of Commercial Lending, joined 21st Century Bank in 2011. With an extensive background in lending, knowledge of the dental industry, he has become a reputable leader in the metro area.  I invite you to reach out to Blair for more information or contact me directly.

Business Banking

Article Contributor: Jonathan Dolphin, President, 21st Century Bank