“Lending” What Buyers Need to Know in 2021!

“Lending” What Buyers Need to Know in 2021!
Posted on 01/02/2021

Buying a dental practice involves making the best decisions not only at the time of purchase, but for your future!  One very important decision a buyer will make in 2021 is choosing the “right” lender. Over the last several years, the lending scene has exploded with competitive interest rates and service programs.  However, in 2020, we experienced an unprecedented experience when banks were called upon to offer SBA backed loans to help businesses survive the epic event of the COVID-19 Pandemic. Banks were faced with very little guidance or direction on how the lending would occur, who would be the major players, and how it would all work out after the dust settled.  Banks were on call for several months to manage SBA fund distributions. This caused some changes in acquisition lending for dental practice sales and new start-up businesses.

Many of the larger chain banks have said that they were overwhelmed with the SBA loan process which stopped or slowed acquisition lending for them dramatically. It wasn’t until mid-August of 2020 or later that these banks slowly moved forward to reenter the dental acquisition marketplace. It appeared that their approach to recover was to offer lower interest rates to offset their competitors.  Unfortunately, even with their loan incentive programs the experience for many buyers has been extremely slow lending approvals (many taking over 30 days to approve or disapprove) a loss of fundamental communication and limited support for the underwriting processes. In many cases, the loan approval process or lack thereof resulted in the loss of sales transactions all together.

Our experience at SAS at this time is that banks with smaller profiles, although they too were involved in the SBA lending process, remained active and effective in acquisition lending even with the Pandemic Pause. Their infrastructures still held strong. They were able to not only manage dental acquisition lending during this time, but they set the “new criteria” and principles of addressing and supporting business values. They recognized the challenges of maintaining traditional production numbers after dental practices were mandated and forced to shut down for several months. They addressed how new operating restrictions have affected the way dentists deliver care. The underwriters for these smaller banks removed at least a three-to-five-month period of production requirements for sellers and effectively recognized the decrease in production due to regulated limits on business operations.  Instead of penalizing the process for dentists selling and buyers purchasing dental practices, they embraced the opportunity to help bring the industry back from such a devastating situation.

With the new dawn of 2021, it is important to know what to look for when choosing a lender.  Here are important “FACTS” that will help you choose a lender to help you buy the practice of your dreams!

FACT:  Interest rates are at an unprecedented low for “ALL” lenders right now!  Consumers often think even the smallest difference of a .5 percent in interest matters in their lending decision.  They may also believe that a lower interest rate means the same service and quality, just cheaper!  However, few consider what the difference of what .5% actually has on an average dental acquisition loan amortized for 10-years. Using the example of a $500,000 loan amortized at 3.5% compared to 3% for 10 years we learn that the difference is only $16.00 more per monthly payment.  That is less than your weekly coffees! Interest rate should not be the only deciding factor for choosing a qualified lender.  Always get the real numbers!  Avoid being “penny-wise and pound-foolish.” Insisting on a lower interest rate may cost you the practice!

FACT: Acquisition loan approvals for dental practice purchases should never take over 7-10 days to approve or deny! Even with the challenges all businesses are facing because of the Pandemic slowdown, the bank you choose in 2021 should be able to (on average) provide an approval or denial within 7-10 days. Some banks are taking over 30+ days to process loans! This is not acceptable. If there is an issue with a loan approval, you should know within the 7 to 10 day period and there should be a bona-fide reason for being denied! Better yet, the lender should be a good resource to either offer a solution to help you with funding or let you know that they just don’t have the program that can fund your request. In addition, long processing times are also not a reflection on the quality of the practice you are purchasing! DO NOT ACCEPT EMPTY EXCUSES!

FACT:  Lenders do not appraise and value dental practices! Never accept “the practice doesn’t cash flow” as an excuse not to fund your acquisition.  What does that mean anyway? If the practice doesn’t cash flow, how has the seller successfully operated their amazing business for many years and not gone under?  How can the seller be taking home 30-35% + benefits income each year?  If it doesn’t cash flow, is this because there is something in the buyer profile that limits your ability to cover expenses?  Can the bank help to restructure your portfolio? The excuse it “doesn’t cash flow” is just not a valid reason from a lender not to fund. Don’t allow a lender to use the practice you want to purchase as an excuse for their lack of resources to fund.  If you have seen for yourself the practice is viable, then ask “why” and ask “for written proof and explanation” of their decision.  Better yet…find another lender!  

FACT:  Not all lenders are the same!  Lenders use different buyer lending criteria to process loans! Banks offering below market interest rates with time limits for processing to snag dental buyers usually have different requirements to lend because they have increased risk. Many of these lenders expect buyers to have at least 10% if not more of the loan amount in their own savings accounts before the bank will loan to them. A $500,000 loan amount will mean you would need at least $50,000 in savings. Not all dental professional lenders have this requirement. Some banks which increase their lending risk also often require higher collection incomes for the practices you purchase. This can increase your debt without necessarily increasing your income. Another way to justify the low interest rate is to require the seller to “carry” or finance some of the loan.  In today’s lending environment, this is not a requirement of qualified banks.  Most sellers will reject accepting having to carry part of your loan. The buyer who can come in with 100% loan approval will have a much higher chance of buying the practice.  Beware of banks willing to give you a “limited” approval letter offering high loan amounts. What do these letters really mean?  Is it worth going through a process to purchase only to learn the bank never intended to provide you funds? The major effect of working with a lender who doesn’t feel you are a qualified buyer is that it can discourage you from purchasing altogether!

FACT: Post-Sale Banking relationships matter! Post-Sale Services include business bank accounts and banking processes for depositing checks, merchant services and much more!  Before you sign on with a lender, you should know when your post-sale services will be available for access, who will help set up the accounts, and what you can expect in your future relationship! Talk is cheap! You should be offered credit card services or open lines of credit that support the business you purchased. The limits should be high enough to help you cover expenses if your cash flow fluctuates.  What are the terms? Do they provide on-going direct support and will you deal with a live designated person to help you as you navigate your new practice? Given, the number of lenders hoping to get your business, why should you accept less?

FACT: Your banker works for you!  Not the other way around. During this last year, we have heard from some lender representatives telling us how fortunate buyers were to have their banks even willing to consider lending for the acquisition of a dental practice. We also heard some believed they were the only banks lending during 2020. NOT TRUE! You should not have to beg for answers, wait several days for basic communication, or be given excuses for why your lender representative is not keeping up with your loan process.  You should expect and receive the highest level of customer service from whoever you put enough trust in to process your request for a loan. A quality loan representative should spearhead the process, follow up with your concerns, assist you with further banking needs and help ensure you get to Closing! If they cannot do that then they should tell you upfront and early!

Whoever you choose should be supportive and welcome the opportunity to serve you!

Our advice is “Don’t put all of your eggs in one basket.”  Shop around for the best lending situation, not just the cheapest. You deserve better and finding the right lender will abundantly pay off over time.  Start at the beginning and create a solid foundation for your future!