A little harder these days

March 21, 2012

Financing in today’s economic environment is incredibly more difficult than before the current financial meltdown. In the past, a reasonable credit score, a passable amount of income and a good concept, such as buying a dental practice, would guarantee a dentist the ability to secure financing at a competitive interest rate with a fair term for the repayment schedule.

Financing in today’s economic environment is incredibly more difficult than before the current financial meltdown. In the past, a reasonable credit score, a passable amount of income and a good concept, such as buying a dental practice, would guarantee a dentist the ability to secure financing at a competitive interest rate with a fair term for the repayment schedule.

In today’s world of banking, however, much more is needed. The package that is presented to a lender should put forth your best face professionally and financially. What should be included in the submission and who should prepare it so that the dentist’s financial picture looks as good as it can be? You’ll need to know the answers to these questions in order  to get yourself in the best position for the best financing.

Presentation package

Most bankers require copies of the last three years tax returns for the dental practice as well as for the owner. They also want comparative financial statements including balance sheets for the dental practice. Typically, a current statement of net worth is also needed for the dentist.

If the presentation takes place more than halfway through the current year, an interim balance sheet and income statement for the dental practice is normally needed as well. Additionally, the specifics of the loan request must be presented to the lender. What is the purpose of the loan? Is the dentist acquiring a dental practice? If so, the lender will also want the same financial data regarding the acquisition target as the existing practice, such as copies of the last three years tax returns and at least a current financial statement. In this situation, the lender typically requests a receivable aging report as well. Many financing sources are also requesting a practice valuation for the possible acquisition. The practice valuation gives the lender a good profile of the dental practice under consideration for the purchase.

Obstacles to securing a loan

Besides all of the above requirements, the major source of rejection today is the lack of liquidity for the borrower. Today’s lenders want to see cash or marketable securities on the books of the borrower or in the dentist’s name on an individual basis outside of the practice. Good income, credit worthiness and a solid concept as the reason for borrowing are not enough any more. Some lenders are rejecting loans when all of the historic guidelines have been met because of the lack of liquidity. Many of the banks have had their own problems so they have tightened their guidelines for loan approvals.

Local banks

How many financially successful dentists know a director on the board of a local bank? The answer is that there are quite a few with this type of contact. The director/friend will promise an easy time and an almost sure thing for the dentist regarding the ability to obtain a loan from his or her bank.

Remember the package that is needed for a professional presentation? Remember the substance of the loan request? Unless the dentist has found a very unusual local bank, the loan request will probably be rejected if those requirements are not met sufficiently. Local banks want hard collateral such as real estate, a specific piece of equipment, or a loan secured by some other tangible asset. An approved loan using goodwill as the major asset collateralizing the loan for a dental practice is a rare sight when a local bank is asked to provide financing to a dental practice, no matter how friendly the directors may be. The dentist’s loan request goes to a board of directors or committee where the friendly director is one of a group who will be participating in the decision process for the loan approval.  

Dental specialty lenders

The specialty lender, who can be defined as a bank or loan broker willing to lend against goodwill and the dental practice’s cash flow, may be the best financing source available today for securing a loan to a dental practice. Even the specialty lender has toughened up the borrowing standards so that it is no longer a sure thing to secure a loan today with yesterday’s criteria. Liquidity is the key to acquiring the loan when all of the other guidelines have been met.
Guidelines for submission

Have your CPA prepare the financial statements and tax returns required by the bank. A professional approach to the submission process will greatly assist in speeding up the loan application process. In treating a patient, the dentist would certainly advise the most professional approach. The dentist’s financial advisors, especially his or her CPA, will provide the same professional format that is always advised by the dentist to the patient. It may take a little bit longer for the submission process to take place, but lenders will usually have a greater degree of reliance on a CPA generated application than that submitted by the dentist.

Be aware of credit checks

A final thought about the application process is to be careful about how many lenders have requested credit checks. Each time a loan application is submitted to a lender, a credit reporting agency is asked to issue a report detailing the borrower’s credit history and to submit a credit score to the potential lender for consideration of that loan request. More than two or possibly three applications for a loan will count as a mark against the applicant and hurt future requests for loan approvals. A theory that lender’s use is that a borrower is desperate for money because of multiple loan requests and credit checks.

When shopping for the best interest rate and payment term, a borrower may think that the logical thing to do is to send out bids to as many lenders as possible and to take the best one. An experienced CPA will advise the dentist to be wary of the number of applications and to make
sure that a possible initial interview is held with the lender to get a “feel” for the approval, prior to presenting a formal request for the loan.

So while there are indeed opportunities for dentists to secure loans in today’s tough times, it is advised that your CPA prepare the presentation and the required tax documents to give yourself the best possible chance for the best possible financing.

Bruce Bryen is a partner in The Snyder Group and managing partner for Bryen & Bryen LLP, Certified Public Accountants. Based in New Jersey, Mr. Bryen specializes in deferred compensation such as retirement plans, income and estate tax planning, the determination of the proper organizational format, asset protection and structuring loan packages for presentation to financial institutions. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness. Contact him at 800-988-5674, ext. 112.