Your Practice Loan in an Uncertain Economy:
The Basics Still Apply
Leslie Franklin
Like many new dentists, you may dream of owning a practice someday. But in today’s uncertain economy, you also may wonder if you’ll be able to get a loan to buy or start that practice.
Here’s the good news: If you have the basics in place, including life and disability insurance (which we’ll discuss later), it’s likely that you’ll qualify for the financing you need. According to Henry Hemmen, president of Henry Hemmen & Associates, a practice management consulting/brokerage service firm in Bettendorf, Iowa, major lenders that specialize in dental practice loans have not cut back in their lending, nor have they imposed new requirements on borrowers.
“Lenders have limits on the amount they will loan to a new dentist, but that’s always been the case,” says Hemmen, whose company has served Midwestern dentists since 1964. “In the past 15 years, I can’t remember a dentist who has been turned down for a loan because of credit problems, and we’ve never had a dentist default on a loan.”
So what are those basics that Hemmen says you should have in place? For starters, make sure your personal credit is strong. Second, be ready to show lenders how you plan to manage and grow the practice. And third, plan to provide collateral - typically life and disability insurance - to guarantee that the lender will be reimbursed should you die or become disabled before repaying your loan.
A Lender’s Perspective
Gavin Shea is director of partner services at Matsco, a national lender headquartered in Emeryville, Calif., that specializes in providing practice financing for dentists. He explains why lenders typically require dentists to provide insurance as collateral for a loan.
“Dentistry is a business that depends on the health and performance of the dentist,” he says. “Without the dentist, there is no practice.
“Insurance mitigates a lender’s risk that a dentist would be unable to repay his or her loan due to death or disability,” Shea continues.
Different lenders also can have different requirements when it comes to insurance. A lender might require dentists who apply for practice loans in excess of $300,000, for example, to assign both life and disability insurance as collateral for the loan. In addition, lenders will routinely look for good personal credit on the part of the dentist. Shea confirms that Matsco has not changed its lending practices due to the current economy.
An Unexpected Opportunity
Marika Stone, DDS, a 29-year-old dentist in Bend, Ore., illustrates how to leverage a good credit history, solid business plan and life and disability insurance to close on a practice loan - all in record time. “I moved to Oregon to work as an associate in a practice after completing my residency program in San Antonio, Texas,” Dr. Stone recalls. “I joined Mill Point Dental Center with the plan to work as an associate for a few years and eventually buy a practice.”
Dr. Stone’s timeline was unexpectedly moved up when the owner decided to sell the practice only six months later. “I was happy with the practice and took advantage of the opportunity to purchase it,” Dr. Stone says.
The two dentists negotiated a purchase price, and Dr. Stone began shopping for a lender that would provide 100 percent financing plus a $50,000 line of credit to cover initial expenses. The lender required an appraisal, business records for the past three years, the doctor’s plan to grow the practice, and her personal credit report, which she says was excellent. “The only debt I had were my student loans.”
The lender’s next requirement was for Dr. Stone to have enough life and disability insurance to cover the loan in case something happened to her, and to assign the insurance to the lender until the debt is repaid. From her student days, Dr. Stone had life insurance through the American Dental Association’s group insurance program, but she needed additional coverage to equal the loan amount. She also had disability income insurance, but she wanted to keep it available for personal expenses if she ever became disabled. She opted instead to apply for another type of disability insurance - business overhead expense insurance - in an amount that would equal her monthly loan payments.
Business overhead expense insurance is a special type of insurance designed to reimburse a dentist for a variety of practice expenses, including loan payments on business debt, in the event of disability. It’s routinely recommended for business purposes for three reasons: First, it’s much less expensive than a disability income policy, which is especially meaningful for a new dentist on a tight budget. Second, premiums typically are tax-deductible as a business expense. Third - and perhaps most important, says Dr. Stone - it keeps a dentist’s disability income insurance unencumbered so it can be used for personal living expenses if a disability prevents the dentist from practicing.
A Speedy Close
Due to the original owner’s circumstances, Dr. Stone needed to close on the sale as quickly as possible. The lender, however, was unwilling to finalize the loan until the insurance was in place.
In situations like this, an insurance company may be able to help expedite the process of getting the required coverage in place if the dentist lets the company know what’s needed. Dr. Stone did just that, and then followed up with the company every step of the way.
“Dr. Stone was very proactive in getting her medical exam scheduled and quickly sending us all the medical and financial information we needed,” says Cathryn Hopson at Great-West Life & Annuity Insurance Company, which administers the ADA Insurance Plans. “Our underwriter was able to make a decision quickly because the information was complete.”
As soon as Dr. Stone’s coverage was approved, the insurance company provided her with collateral assignment forms, which she completed and returned. Recorded copies of the assignments were forwarded to the lender, and the loan was finalized.
When Dr. Stone pays off the loan, she will notify the insurance company to remove the collateral assignments from her policies. Until then, her lender, as the collateral assignee, has the right to verify that the premium payments are current. However, the lender cannot make changes to either policy, such as changing a beneficiary or face amount.
Dr. Stone’s loan is for 10 years, although she hopes to repay it sooner. Was the effort worth it? “Yes!” Dr. Stone says. “I love my practice. It’s great to be able to offer my patients the highest quality of service and care.”
Editor’s Note: This article does not constitute legal, tax, or financial advice. Please seek professional input as appropriate to your situation.
Here are four tips to help get your loan approved as quickly as possible:
- Get your credit in shape. Establish good credit by making payments on time for your credit card, car loan, and other bills. Keep your total credit card debt well below your credit limit.
- Do your research. Learn what lenders will require and when you will need to provide it so you can be ready ahead of time. Early in the process, find out if you will need life and disability insurance as loan collateral.
- Get a jump start on your insurance. To save time later, start getting your insurance in place now. Take advantage of free or low-cost insurance that is offered to you during dental school.
- Work with a team. Get the advice of experienced professionals who can help you move smoothly through the process of obtaining a loan for your new practice. The team might include a practice broker, financing firm, insurance company, accountant, and attorney. A checklist of people to call and things to do can help keep you organized. ■
Leslie Franklin is Director of New Dentist Markets at Great-West Life & Annuity Insurance Company. She meets regularly with new dentists and dental students across the country to help them understand how to use insurance to attain personal and professional goals. Great-West Life underwrites and administers the ADA Insurance Plans and is the sole provider of ADA-sponsored life and disability insurance to ADA members. For more information, call 888-463-4545 or go to www.insurance.ada.org. You can also contact Leslie directly at leslie.franklin@gwl.com.
