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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.
What does it take to be able to borrow for a dental practice acquisition, refinance of its existing debt, or to borrow for equipment purchasing, working capital credit lines or any other legitimate business purpose? There is an application process that the dentist can follow that will either expedite or slow down the approval actions necessary for the loan request. It is a good idea for the dentist to rely upon advisors who have knowledge and experience to prepare a presentation that will allow the lenders to work as quickly as they can with the information they receive that is complete. Receiving documents in a piece meal manner is a sure way to get the lender frustrated and to spend time working on projects with a fully completed presentation that is professionally prepared, prior to the one which is his or her own package, which may not be in a final format. With credit being at a premium, and with local banks almost all not being available for dental practice loans, what must be in the package so that its review goes smoothly?
For those dentists trying to save money in presenting the loan package to the lender themselves, a mistake is potentially being made by following this approach. The dental CPA is the one to ask to present the loan application on behalf of the dentist. The dental CPA understands what the lender wants and can prepare the documents necessary to receive a fast response from the bank. In cases where a dental supply house is selling equipment, a loan is probably easily obtained with them since they are earning a profit on the sale of the equipment and don’t want to lose the sale with a sloppy application submitted by the dentist to a conventional lender. For a practice transition, refinance of existing debt, or working capital line, the dental CPA is the one who will receive action from the lender in the most professional and quickest manner. Typically, the local banks do not know how to lend to dental practices since the lack of collateral is a major stumbling block. Even dentists who have friends on the board of a local lender will find that, when a substantial amount of money is to be borrowed, an approval process from the entire board of directors or a committee of management and not the “friend,” alone will be making the decision about approving the loan. Financial statements, tax returns, a personal and dental practice profile and the reason for the request will be arranged in a format easily understood by the banker and available for a quick response. For a simple type of loan at a lower level of funding, the dentist may be able to affect the transfer on his or her own, but for a substantial amount of borrowing, it is almost a lost cause to do so without the assistance of a dental CPA.
Assuming that the dentist engages a dental CPA to assist in the borrowing process for larger sums, the next point of interest would be the approach to the rate and term of the loan. There is an old adage that “cash is king.” Many dentists approach borrowing and want the cheapest interest rate available. They will argue and go to bank after bank to obtain the cheapest rate, even if a quarter of a percentage point may be the difference in the interest rate offered. Sometimes the term is overlooked. In most cases, a bank will lend at a cheaper rate as the term of the loan decreases. This may save some money but the shorter loan term creates a higher monthly payment. A dramatic shift in monthly payment by an extension of the term can create thousands of dollars of annual cash flow to the dentist at a slight increase in the cost with a higher interest rate. Good dental CPAs will describe tax savings at a federal and state level that may be many times the savings compared of a higher interest rate. Retirement plan funding, a more comfortable lifestyle, and money in the bank may be ignored for the sake of saving the interest and enduring the pain of higher monthly payments with the shorter loan term.
The best approach is to get advice from the dental CPA and an explanation of tax savings, additional cash flow compared to interest savings, and what takes place with the funds available prior to determining the best rate and term.