What do the banks look for when offering funding for a dental purchase?

Buying a practice can seem a daunting proposition; it’s often something that a dentist may do only once in their career, and therefore they’re unlikely to have any experience of the process . Here, David Brewer, Managing Director at FTA Finance, shares some of what he’s learnt over the years about funding for a dental practice.

What do the banks look for when assessing the strength of a client looking to purchase a dental practice?

Most people do not realise that their CV is the most important document. Most CVs I see are great clinically, but less so on the managerial experience side. Banks will take comfort that you have suitable managerial experience to be able to manage the practice in question.  In reality, most dentists have more experience in this area than they may realise, often acquired through the day-to-day running of their practice.  It is important to emphasise this in your CV before it’s shared with a potential lender.

The lender will likely want to see a summary of the applicant’s personal asset/liability profile and personal outgoings, a breakdown of prior earnings (ideally Accountant prepared accounts) and their Bank statements.

They will then focus on what the applicant is considering purchasing – primarily Practice Accounts and Valuation or Sales Prospectus  –  Key is establishing the strength of the subject Practice, scope for growth and ultimately to demonstrate that any loan can be comfortably repaid based on how the purchaser is proposing to run it  –  plus a suitable surplus to cover the purchaser’s personal drawings, tax and future reinvestment. 

Of course it’s impossible to predict the future, so we advise clients to prepare two scenarios, a conservative (or worst case) model, showing no growth in revenue after acquisition, and a second version showing the full impact of any changes they plan to make. This helps both the lender and purchaser to fully understand the risks associated and demonstrates it is a viable purchase.

Do all banks look for the same thing when considering funding for a dental practice?

In short no, credit criteria can vary significantly from lender to lender.  Size of deposit, the relative split of private and NHS patients and whether the property is Freehold or Leasehold can all play into the bank’s decision. This is where an individual trying to arrange funding direct may become unstuck.

At FTA Finance we work with 14 high street banks and a number of smaller niche lenders. Even within the same bank we know we will obtain a different lending decision based on which individual managers we approach.  It’s important to know the ‘pro-active’ managers and exactly who to approach.

Pricing also varies markedly from lender to lender, and the key here is to work with a specialist broker to negotiate competitive and flexible terms.  

Your specialist broker will know the manner in which a funding proposal should be presented to the bank and package the case accordingly.  This will ensure your proposal is given priority, attracting  competitive and flexible terms unlikely to be replicated if you approached the lenders direct.

Are there regional differences?

In theory, no. A bank’s lending criteria to acquire a practice in the West Country for example would be the similar to one in the South East.

However higher goodwill and property prices in the South East may make it slightly more straightforward to purchase outside of this area — with the prices generally lower and as a result the cash contribution you have to make correspondingly lower and potentially more affordable.

It’s a good idea to undertake a financial pre-assessment before you ‘take the plunge’.  Reputable brokers will do this for you at no cost, providing a realistic purchase ‘budget’ and point you in the direction of suitably sized practices.  A broker can also provide a pre-assessment certificate for purchasers to show to sellers and sales agents, that reinforces your position as serious buyers.

Do lenders prefer NHS to private?

As a rule, yes.  The majority of banks prefer the security of NHS income and as a result their lending criteria is positively weighted towards such practices. However, my own view is that this is not necessarily the best approach. If I was buying I be very interested in a well-established suburban private practice because I know I am in greater control of future revenue streams without the risk of the NHS potentially changing my terms at some point in the future.

How do rates and terms vary — and why?

Recently we have seen bank loan margins ranging from a low of 1.8% over base rate up to an astonishing 7.6% over base. This latter (7.6%) case which was a quote the client received from their existing bank for a loan of £400k to acquire a second practice. With some ‘homework’ on our part at FTA we were able to secure alternative terms for the client at 2.95%; you don’t need to be a rocket scientist to work out which offer the client took!

A specialist healthcare broker will have fostered links and agreements with the main lenders and in certain cases can obtain preferential borrowing terms which may not be available if a client approaches the lender direct. As the above example illustrates, there is huge variation between lenders which is time consuming for an individual dentist to navigate.

Closer to home, even as a commercial mortgage advisor myself, when my fixed rate house mortgage expired I engaged the services of a specialist independent personal mortgage advisor to seek the best deal for me.  I did not have the time to research the personal mortgage myself and certainly would not have had the leverage as an individual to obtain the terms my mortgage broker secured. If it works for your home, it can work for your business too!