As A Dentist:Your Relation With Your Bank !

Ziad Abdul MajidBDS, DipImpDent, Orthodontics Resident

Dental Practice Management Course November / 2016

Outlines:• Introduction.• Financing dental transitions.• Preparing for a practice acquisition loan.• Assessing the borrower’s personal credit.• Preparing a file for a Commercial Lender.• Understanding the Commercial Lender.• Types of Lenders.• Questions to ask potential lenders.• Analysis of the Practice.• Loan terms, rates, and typical conditions.• How to maintain an excellent relationship with a lender.• References.

Introduction:• Many new dentists worry about

obtaining essential first time financing, because they are not prepared to approach a commercial lender.

• Banks and other financial institutions use several standard types of statements to assess the financial health of a business.

• Understanding how to develop these statements, what each component is, and what they show is important in which this information can then be used for planning and analysis of the practice.

Financing Dental Transitions “The State of the Industry”

• In today’s commercial lending, dental transition financing can cover up to 100% of the purchase price.

• The lender will meet underwriting criteria specific for dentistry and will have a portfolio or past loans from which inferences have been drawn and risk mitigated.

• Sources of lending for new dentists include seller financing, local or community bank financing. In general, all lenders are looking for borrowers with ability to manage debt, as evidenced by a satisfactory review of personal credit.

• Dentists have an attractive record of paying their commercial loans in full and on time, as their default rate is low, this is due to ethical character and professionalism, lenders do favor doctors with good personal credit and allow them to finance a qualified practice at 100% with favorable terms.

Preparing for a Practice Acquisition Loan

• Banks make a distinction between commercial and consumer loans.

• In general, commercial loans are granted based on the strength of the borrower and on the business opportunity they represent, of primary importance is the doctor’s personal credit profile.

• The typical business loan is structured over a 5- to 10-year period. The interest rates may be fixed or floating, and there may be conditions that relate to the business.

Assessing the Borrower’s Personal Credit

• Credit report gathers data on each consumer and provide a report that includes a list of accounts, timeliness of payment, and public information such as tax liens or judgments. They also employ statistical modeling through the borrower’s past performance as they create a credit score on each consumer.

• This score helps lenders evaluate how reliably the borrower is likely to repay the loan promptly. Credit scores range from 300 to 850; the higher the score the better.

• Credit scores are influenced by the following factors :

-Timeliness of monthly payments. -Amount of debt. -Type of debt . -Inquiries from outside vendors.

• Experience in evaluating the credit reports of new doctors has revealed several common but easily avoided problems.

• Assessing the income requirements before buying a practice and applying for a business loan, it is essential to know the amount of money necessary to run the borrower’s household.

Preparing a File for a Commercial Lender • It’s recommended that a borrower have the

items below handy when applying for a loan.

• These items should be ready for the lender:

- 2 years of personal tax returns. -CV. -Dental license. -Production reports from current associate ship. -Life insurance and disability policies. -Personal financial statement. -Income requirements. -Copy of self-obtained credit report. -Any appropriate references.

Understanding the Commercial Lender

• Lenders can be divided into two categories: asset-based and cash flow driven.

• An asset based lender looks first at the collateral or hard assets of the business to secure the loan. (Eg., equipment, furnishings, inventory, and work in progress).

• Cash flow-driven lenders tend to be specialty oriented. These lenders make their decisions based on the ability to generate enough profit to fund the debt.

Types of Lenders • The likely types of lenders encountered are the

seller, the local bank, the specialty lender, and the loan broker.

• Seller Financing: They may offer more favorable terms than the commercial lender. In the event that the buyer is unable to get outside financing, seller financing may be the only option.

• It is important for the buyer to make sure he has a competent and experienced dental-focused advisor who can thoroughly review the transactions. The lender will not be there to analyze cash flow, with the aim of protecting the buyer.

• Local Bank: tend to be generalists with asset-based lending philosophies.

• The benefits are that the borrowing dentist can centralize his banking into one institution. Rates are usually favorable and might be 0.5-1% lower than some specialty lenders.

• They have difficulty offering 100% financing. which may require a co-signer for the loan to shore up.

• They also require the practice to maintain a business account and to agree to a minimum balance in that account.

• Specialty Lenders: While they offered 100% fixed-rate financing, their rates were significantly higher than local banks and had restrictive terms including significant prepayment penalties.

• There are several large banks that have dental specialty lending divisions, they benefit doctors by providing 100% fixed-rate financing, usually with minimal fees and flexible terms for prepayment.

• Loan Brokers: bring borrowers and lenders together, but it is important to know that they do not underwrite the loan or keep the loan long term.

• Brokers can be of great value in situations when a loan is difficult to place, but they are likely to be the highest-cost loan source in the market, since the broker must be paid in some fashion, either by fees or by increased interest rates.

Questions to Ask Potential Lenders

• The following questions will help to understand if a lender is interested, has knowledge of dental acquisitions lending.

• What markets does your bank serve? • Does your bank provide commercial loans for

new professional practices? • Do you offer 100% financing for business

loans?• Do you have other dental clients? May I speak

with one of them? • How does the loan decision get made? • How long does it usually take to get a decision? • Who will fund the actual loan? • Who will service the loan long term? • If I have problems, who do I call?

Analysis of the Practice

• Cash flow analysis of the practice is imperative, all lenders must and will insist on performing their own analysis of the practice’s cash flow, insufficient cash flow will prevent loan approval.

• The analysis is performed by taking the net income of the practice and “addback” expenses that the new owner can use to cover debt and personal expenses.

• Key to an approval is putting together the objective and subjective analysis of the practice and the buyer. Cash Flow Analysis is performed using the following:

• The practice’s tax forms from 2 years past.

• The current year profit and loss statement (Income statement Revenue - expenses = net income).

Loan Terms, Rates, and Typical Conditions

• Terms, rates, and conditions will vary from lender to lender.

The Proposal Letter

• It’s a letter offered by the lender proposing rates, terms, and conditions for the loan transaction. The proposal might be issued after a simple review of personal credit.

The proposal letter should contain the following rate and term information:

• The name of the entity who is borrowing the money and the borrower.

• An outline of the purpose of the financing. • The term of the loan (typically 7–10

years). • The interest rate of the financing. • The expiration date should be clear. • Fees should be clearly stated.

• The next section of the proposal letter should contain the standard approval conditions.

Sample conditions include but may not be limited to the following:

• Evidence of a professional license.• Evidence of a legal entity in good standing

(corporation or partnership), if one exists. • Satisfactory review of a buy/sell agreement .• An office lease that shows the dentist can practice

at the site for a minimum of 5 years .• A provision stating that the lender may secure a

first security interest in the practice.• Available funds to be used for business purposes.

The Commitment Letter: • After the credit underwriting is complete and the

loan is approved, the lender will issue a commitment letter.

• It will states that the application for the loan has been approved.

• Upon receipt of this letter, it is essential to have an advisor review it to confirm the terms and conditions are clear and consistent with the buyer’s needs ( Eg., The loan rate, basic terms, insurance requirements, and prepayment policies should not have changed).

• Loan documents including a note, security agreement, personal guarantee, and corporate guarantee must be reviewed and signed.

• A competent lawyer versed in dental practice transitions is important to the buyer at this time.

• The lender will follow up for all the items requested as a condition (license, buy/sell agreement, evidence of insurance or that applications have been made, etc.).

How to Maintain an Excellent Relationship with a Lender

Expectation of the Borrower

• The borrower should expect timely and accurate bills, a good service center should be available to handle problems and prevent errors.

Expectation of the Lender

• Lenders expect timely payments. This is essential to maintaining a good relationship.

• In case of a new buyer having difficulty paying promptly , he must make a priority of informing the lender.

• The worst situation for the lender and for the buyer occurs when a bad situation is hidden until the practice is near default and time is growing short. At that point the lender has few alternatives and little flexibility to work with the dentist to save the practice.

• An experienced lender and an educated borrower can develop successful transitions and keep practices healthy far into the future.

In Brief ...

When it comes to building a better relationship with your bank, first remember the adage “don’t be a stranger.” it’s important to visit your bank and establish relationships with bank managers, loan officers, and staff. These people can become your company’s champions, and they are much more likely to do so if they can put a face to a name.

References

• David G. Dunning and Brian M. Lange. 2008. Dental practice transition: a practical guide to management, 1st ed.

• Finkbeiner, Betty Ladley, and Finkbeiner, Charles Allan. 2011. Practice Management for the Dental Team, 7th ed. Philadelphia: Mosby.

• Rattan, Raj. 1996. Making Sense of Dental Practice Management: The Business Side of General Dental Practice. Abingdon.

“Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight” Henry R. Luce

Thank You