Can You Get Practice Purchase Financing Despite Your Student Loan Debt?
Student loan debt levels have exploded over the last decade. According to the American Dental
Education Association (ADEA), the average 2019 dental school graduate had $292,169 in student loan
debt. And many specialty program graduates had over $500,000 in student loan debt. Even if this debt
is repaid over a 20-30 year period, the payments can be substantial, often amounting to thousands of
dollars per month.
Struggling under this heavy student loan debt burden, many young doctors simply assume there’s no
way they can qualify for a loan to buy a practice. After all, if their goal is to get out of debt, why would
they even think about taking on even more debt? And corporate (DSO) recruiters feed on that fear,
sending the message that because of their heavy student loan debt burden, a long-term associateship is
their only career option.
There’s only one problem with that message, says Wade Coleman, JD*, a practice transition specialist
with Roger K. Hill & Co., Inc. It’s just not so!
Impact of Student Loan Debt
Coleman says lenders understand and expect new grads to have significant levels of student loan debt.
The critical part of the practice loan approval process is the bank’s cash flow analysis. Banks look at your
total debt—student loans, credit cards, auto, and home mortgage—then add up your total monthly
payments. They then determine if you can afford to make the practice purchase loan payments back to
them, based on the positive cash flow generated by the practice you’re purchasing.
Bankers understand the fastest way to get out of debt is to make more money, says Coleman. And the
best way to make more money is to be a practice owner, not a renter (associate). Their experience
shows that the dental profession produces some of the best cash flow, and has one of the lowest loan
default rates, of any industry they lend to. That’s why there’s keen competition among numerous banks
to make dental practice loans under the right circumstances.
While a handful of banks will make practice purchase loans available to young doctors straight out of
school (mostly for specialty practice purchases), most require at least some (normally 18-24 months)
experience. This provides time to build your clinical speed, as well as to establish a track record of
production and managerial experience.
Total Productive Capacity
Coleman says your production track record is more important than the length of experience. He says
most banks want to see you producing at least 70% of the doctor production in the practice you’re
buying. For example, assume you’re looking to purchase a practice generating $1,000,000 in total
collections, with $750,000 of doctor collections and $250,000 of hygiene collections. You’ll need to
produce at least $525,000 in doctor production (70% x $750,000), or $43,750 a month, to prove to the
bank you’ve got the productive capacity to maintain the practice at its current level.
Good Credit Required
You also need to demonstrate decent credit, with a credit score in the high 600s or above. Anything
lower is a “red flag” to lenders, indicating you have either a poor track record of debt repayment or of taking on too much debt.
You may also encounter problems if the practice you’re buying is headed downhill, showing recent
declines in new patients, production, and profitability. Many banks are hesitant to fund purchases of these “dying quail” practices, says Coleman.
Good Time to Buy
Coleman adds that if you meet the criteria above, now’s a great time to purchase a practice. The
combination of the pandemic and the rising stock market has pushed many more doctors to sell,
increasing the supply of available quality practices. Numerous banks are aggressively looking to lend, at
some of the lowest interest rates in history. Most loans offer 10-15 year repayment terms at fixed interest rates, which keeps monthly payments low, providing more cash flow to invest in marketing, continuing education, and new technology to grow your practice.
*For more information on purchasing a dental practice, contact Roger K. Hill & Co. or call 704.424.5626.