I recently bought a house. Without question, once my wife and I had decided on the house the financing was the most painful and infuriating part of the closing process.
I wasn’t sure how many lenders I should be talking with.
I wasn’t sure at what point I had enough information to compare the options.
I didn’t know how the lenders would react if they knew I was considering several options.
Once I did get some offers in place, the formatting and language in them were so different that I felt like I needed the Rosetta stone to compare them. I have a degree in finance and an MBA from a top school. And I help dentists compare loan options every working day of my life! At multiple points, I thought, “If this is so painful to me, I bet my clients feel even worse with their practice loans.”
Lots of buyers tell me that getting your practice loan locked down feels similarly painful. They know it’s a huge financial decision, and the process feels opaque at best.
My goal with the below is to give you a few rules of thumb and a basic roadmap to compare two dental practice loans you might be considering. Remember, though, that the advice below is general and based on working with the major dental practice lenders in the country. Everyone’s situation and bank can be slightly different, so get competent help.
The post below gives you a feel for the ground rules of the game. This will help you understand what the banks and lenders are thinking about daily as they work with you.
My next post will be all about the comparison points of the offers you’ll get. What matters, and what doesn’t.
Ground Rule #1 – Understand the Difference Between a Proposal and an Approval
Dental practice lenders know when you call with a practice in mind that you’d like an answer quickly. Some lenders, therefore, compete on speed. The banker you’re talking with will get a written proposal on the table as quickly as possible.
A proposal has not gone through underwriting yet. The terms on the sheet are close to what the salesperson believes underwriting will approve. But it’s the salesperson’s best guess. For obvious reasons, banks have the salespeople out talking to dentists AND they have the back room with the underwriters who decide if a borrower is actually going to pay the bank back. The underwriter is the one that sets the loan terms.
The key advantage of this approach is speed and your ability to show a seller than you can get financing. Obviously, the downside to this approach is the terms on the page could change after the underwriting team looks at the deal.
The other approach is the approval.
Other banks will compete less on speed, but on a good experience. Part of that good experience is making the first written offer the approved one. The main disadvantage to this approach is it typically takes a few days longer to get an underwriting-approved written approval to show the seller and make a plan for timing and expectations. But, you have final terms written down on paper, approved, and locked in. If you choose the lender that takes this approach, typically the deal can move very quickly after you commit.
It’s important to remember “slower” is not a synonym for “worse.” Remember different banks have different underwriting standards. One bank can provide a quick approval, and another bank can ask for more information. A request for more information typically means the underwriter found some items that could be potential issues. They are red-flagging items that could burn you as the future owner. As infuriating as repeated questions can feel, usually it’s in your best interest to remember the reason for the extra time is to protect your investment.
In my experience, most (but not all) of the reputable dental lenders in the country use approvals and not proposals. They’re willing to put in the work up front to go through underwriting with potential clients before the dentist commits. They’re confident enough in the ultimate terms offered they’re willing to take a little more time upfront to get you the best option.
My recommendation is you use a lender who will commit to full approval. But at a minimum, know the difference between the two.
Ground Rule #2 – It’s Expected You’ll Talk with Multiple Banks
The banker you’re talking with would LOVE it if you were only talking with him or her. But they know you’re probably not.
When I can get a banker in a candid moment, even they admit dentists ultimately end up with better terms when there are multiple banks at the table. You can read more on my recommendation that you should probably only talk with two banks here, as long as you’ve vetted the two and they are both dental-specific.
Dentists who do the best and have the most professional interactions with bankers are open and upfront through the process about who they’re talking with and what stage they’re in. The best bankers I know are totally fine with a dentist talking with other banks as long as they know where things stand and how the process is going.
I strongly recommend you talk with multiple banks, but that you also be upfront and open with the banks about who you’re talking with and where things are in the process.
Ground Rule #3 – You Can’t Compare Your Rate to Your Buddy’s (or the Guy on Facebook)
The bank has one real concern: are they going to get paid back?
So how do they decide?
Each of the different bankers I’ve worked with share similar numbers to describe what specifically their underwriting teams look at when considering a dental lending deal: 60% of the decision to give you a loan has to do with the practice, and 40% of the decision has to do with you personally as the borrower.
60% of the Decision – the Practice Numbers
On the practice side of the deal, the bank will look at the numbers below and feed them into the cash flow model. They’ll use this model to project how much money you’ll make as an owner of the practice you’re considering, and if you can afford to make the required loan payments.
- Collections – How big is the practice? Are collections growing or shrinking?
- Profitability – How much of each dollar of collections does the doctor keep after paying all the expenses of the business?
- Hygiene Production – What percentage of total production comes from hygiene? What percentage comes from new patients? Returning patients?
- Procedure Mix – Can the purchasing doctor perform the same procedures the selling doctor performs? How much is being referred out?
40% of the Decision – Your Creditworthiness
Now, over to the personal side. What specifically about YOU will the banks look at?
While the majority of the decision to lend you money will depend on the economics of the practice, you still have to have solid credit to get a loan for hundreds of thousands of dollars. Your dental degree is not reason enough.
You can read more about the five things you need to get a dental practice loan here. In summary, they are:
- A Solid Production History
- Credit Score over 680
- Clean Credit History
- About a Year’s Worth of Experience
So think about the 60/40 rule and all that goes into an underwriter’s decision to lend to you at a specific set of terms. If you’re comparing your rate and terms to what someone claimed they got on their practice loan on Facebook (a notorious place to fudge, incidentally), you’re making a huge mistake.
No two dental loans are the same because no two practices and no two borrowers are the same.
Don’t compare your practice loan terms to what you’re seeing other people claim they’re getting online. Compare your loan terms against the options you have in front of you.
In the next post, I’ll tackle how to compare two approvals. What matters. And what probably doesn’t.
In the meantime, if you need help comparing two loans or just need to know which banks and bankers are the best to talk to in your area send me a note directly firstname.lastname@example.org and I’ll respond personally.
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