How to Finance a Dental Practice

Dental practices can be expensive to start from scratch, with Bank of America finding that startup costs typically fall between $350,000 to $500,000. As a result, many dentists looking to start their own practices will leverage financing.

There are multiple financing choices you can leverage, including options designed to help you acquire existing practices or to start your own. Fortunately, some of these funding options are available even if you have high student loan debt.

Types of loans to open your dental practice

There are multiple types of financing available when you’re ready to open your dental practice, so consider all of your options to determine which would be best for you based on factors like repayment conditions, dental practice loan rates and eligibility requirements.

Practice acquisition loans

Practice acquisition loans are a type of business acquisition loan that can provide the funds you need to acquire an existing practice. The funds may cover the costs of the acquisition itself, including any legal fees included in the transition process. They’re typically term loans, but some lenders may also offer lines of credit.

They may be used to:

• Buy-out an entire practice
• Buy-out specific partners
• Allow for associate or partner buy-ins

Acquiring a practice may come with distinct benefits, including:

• An already established team and processes
• An existing client base, which can result in immediate cash flow
• An existing office that already has equipment and supplies

A large number of vendors offer practice acquisition loans with unique offerings. Wells Fargo Bank, for example, offers fixed-rate loans with terms up to 15 years and a variety of repayment options. Bank of America dental loans also offer 15-year terms, but offer 25-year repayment terms if you’re purchasing commercial real estate as part of the deal.

Equipment financing

Equipment financing offers funding to get equipment for your practice, which can include patient chairs, office furniture and essential dental tools and supplies. They typically take the form of term loans, but some lenders also offer lines of credit for this purpose.

Most equipment financing leverages the equipment itself as collateral, which prevents the borrower from needing to provide a down payment or offer additional collateral to secure the loan.

You may also have to lease dental equipment. This allows practices to rent high-cost equipment for a period of time, after which they can return it, renew the lease or purchase the equipment outright under pre-agreed upon terms. This may be more cost efficient upfront, as it can reduce strain on your cash flow initially, but it often costs more in the long run.

Term loans

Term loans provide a single lump sum of funding at the time of approval, which is then repaid in regular payments over a set period of time. They may or may not require collateral, depending on the loan provider and their requirements, and are a popular option for dental office financing.

There are plenty of options for term loans, including short term loans and long term loans for businesses. You can apply for these loans through regular banks, credit unions and private lenders. SBA loans may also be a good option, as they have capped, competitive interest rates and terms set by the SBA but are offered through participating banks.

5 steps to get a dental practice loan

When you’re ready to start a new practice — or acquire an existing one — you can follow these five steps to secure a loan and purchase your practice.

1. Decide what kind of practice you want to open.

Taking the next step in practice ownership can take several different forms, including:

• Acquiring an existing practice in full, taking complete ownership. Gain full control over an established practice with built-in clients and income. This can be expensive, and lenders will want to see business plans indicate the practice will be profitable under your leadership.
• Buying into a practice as an associate or partner. Gain partial stakeholder ownership, but not full ownership, while benefiting from an established practice. This can be a good option for dentists who want to be a partner but don’t need full control or want the risk that comes with 100% ownership, but it does require finding a practice that’s open to a new partner or associate.
• Starting a new practice from scratch. Create your practice from the ground up exactly as you envision it. While you have full control from the outset, it can also be challenging and expensive to build and supply an office, attract new patients and hire a team. Lenders will likely heavily consider your personal finances alongside detailed business plans.

2. Prepare your financial documents

Before applying for financing, prepare any documents that may be needed for the application process. This can streamline the review of your loan, speeding up your time to funding if approved.

While the exact requirements may vary based on the type of funding and lender you choose, you can expect to need the following documents:

• A detailed business plan that includes current financial performance, future financial projections and the actions you’ll take to maintain or increase profitability.
• Detailed financial information on the practice you want to acquire, including a profit and loss (P&L) statement and the past two years of business tax returns.
• Purchase price information, including detailed estimates of specific costs like acquisition fees, equipment costs and construction costs if relevant.
• The last two years of your personal tax returns.
• Bank statements, potentially including personal or business bank statements.
• Personal financial information, including assets, other income and debt like student loan balances.
• Signed letter of intent if you’re already in discussions for acquisition with a potential practice.

3. Talk to lenders and apply for funds

As we’ve discussed, there are plenty of lenders and financing choices available for dentists who want to own a practice. It’s important to review your options carefully to determine which lender is best for you.

Speaking to multiple lenders is an important part of the process, as you can:

• Assess eligibility requirements. Some lenders may have funding options with more flexible eligibility requirements, such as having lower personal credit score requirements or requiring less collateral.
• Get quotes. While many lenders have starting interest rates listed on their sites, getting quotes will give you a clear idea of what different lenders offer currently in terms of interest rates, repayment terms and term length.
• Review your loan options. Loan officers can make financing suggestions based on your immediate needs and long-term goals. While you might get in touch about a term loan, for example, they may recommend a working line of credit because you plan to acquire and then expand an existing practice over time.

4. Choose a lender

After collecting several quotes for loan products, you can choose a lender. While doing so, remember to consider the following:

• Interest rate. Look at your quotes to assess which lender offers the best interest rate that aligns with the loan terms you want.
• Terms. Terms define how long it takes to pay off the loan. You’ll generally pay less interest overall for shorter-term loans, but a longer repayment period will give you lower payments. Calculate both the total cost of borrowing and the monthly cost when comparing terms.
• Speed of funding. Some lenders offer accelerated or even same-day loan approval or financing, which can be ideal if you’re trying to close a deal and secure funding quickly.
• Fees and costs. Review the loan’s conditions, including policies around potential prepayment penalties, late payment fees and origination fees. These fees can influence the total cost of the loan.
• Additional benefits. Some lenders offer perks for borrowers outside of the financing. This may include access to business consultants or account experts. All else being equal, these perks may be worth considering.

Once you’ve selected a lender, apply for the funding of your choice.

5. Purchase your practice

After your loan application is approved by your desired lender, you can review the loan’s terms and ensure that it’s a good fit for what you need. Once you accept the loan, you’ll receive funding.

After you receive the money in your account, you can officially buy the practice. This process will vary depending on whether you’re buying into an existing practice or starting a new practice from scratch. However, it’s a good idea to work with a lawyer to ensure that all contracts are legally binding to protect yourself and your purchase.

How to make your application more competitive

To make your financing application more competitive, you should consider the following:

• Improve your credit score. Ensure your credit score is as high as possible and avoid taking out new substantial personal debt immediately before applying for a business loan. To increase your odds of obtaining an SBA loan, you’ll want to shoot for a minimum credit score in the high 600s.
• Minimize your debt-to-income ratio. Loans for new businesses often look closely at your personal finances, so having a low debt-to-income ratio may increase your chances of approval.
• Have a detailed business plan. Show that you’ve done your due diligence with exact breakdowns of specific potential costs, realistic financial projections and clear steps that you plan to take to launch the new practice and establish profitability.
• Get feedback from a loan officer. You can consult a loan officer with your desired lender to learn more about what they’re looking for in an application. Tailor your application to their requirements, including any documentation they recommend sharing.

How student loans affect your application

Many dental student graduates have high student loan debt, owing an average of $296,500. While a high debt-to-income can impact your ability to get a loan, many lenders expect dentists to carry some student loan debt. This debt doesn’t necessarily prevent you from acquiring funding outright, but it may impact the amount you’re approved for or how much collateral a lender requires.

Lenders will typically assess the following:

• If you have a strong credit score with a history of responsible loan repayment.
• If your debt-to-income ratio with student loans can accommodate the additional loan, especially if it will take time before your practice reaches profitability.
• If you have some form of collateral if you’re considered high risk for the financing.