This article originally appeared in Catalyst Magazine.

Throughout the course of one’s career in dentistry, opportunities arise that call for outside financing. Recent dental school graduates dream of starting their own practices. Existing practitioners want to upgrade or expand their practices or perhaps purchase a satellite location. All such initiatives tend to be capital intensive, and therefore generally require taking on debt. Fortunately, lenders deem dentists a good credit risk given their low default rate on loans.

This article provides guidance on how to prepare for making a loan application and what options are available to secure dental practice financing.

Like other entrepreneurs, dentists need to present themselves and their businesses as worthy of investment. Personal credit history is a good place to start as it plays a key role in lender determinations.

The three major credit bureaus—Equifax, Experian, and TransUnion—provide free credit reports and credit scores based on payment history, outstanding debt, length of credit history, credit inquiries for loan applications, and types of credit in use. The higher the credit score, the greater the opportunity to secure a loan and obtain attractive rates and terms. To increase one’s score, credit reporting errors should be challenged and cleared. Past due bills should be brought current and unneeded debt retired. A good track record combined with a manageable debt load suggests an individual with the requisite discipline and restraint to meet future obligations.

A dentist must create a business plan that demonstrates knowledge of the relevant market, a credible plan for generating revenue in that market, a viable operational model for service delivery, and an administrative approach that yields a sustainable business. He or she must have an awareness of the demographics, population growth, and competitive landscape in the target practice area. Past, present, and future (pro forma) financial statements characterize the current and future fiscal health of the business venture. Key performance indicators also provide critical insights— e.g., production and case acceptance, continuing care, mix of services and relative profitability, scheduling optimization, collections, etc.

Armed with this information, the dentist can identify the rationale for external funding, define the use of loan proceeds, and work through the mechanics of how the loan would be repaid. This analysis also determines whether he or she is eligible for credit and, if so, which loan types and terms are best suited to the present need. While many of the skill sets required to conduct this preparatory work fall outside one’s professional training, CPAs, tax advisors, consultants and others who specialize in this market are available to provide expert guidance and support.

Finally, some lenders require life and disability insurance (or business overhead insurance) as a condition of financing. This requirement arises due to the fact that loan repayment depends upon the life and health of the dentist. As underwriting for this insurance can take 4-6 weeks, it’s worthwhile to start this exploration well in advance of tendering a loan application.

1. Small Business Administration

The Small Business Administration (SBA) offers a number of programs to help dentists launch or expand their practices and help them flourish.

2. Commercial Lender

As noted earlier, low default rates among dentists make them attractive credit risks for commercial lenders. Many lenders offer 100% dental practice financing for practice acquisition, expansion, and upgrade. Limits to a borrower’s credit capacity include unattractive personal credit histories, high debt in relation to practice assets or equity, and concerns regarding core business skills to make a practice thrive. The latter includes one’s ability to develop and retain patients, make compelling arguments to accept treatment plans, and institute effective business and fiscal management practices. As with SBA loans, commercial lenders expect to secure loans with some form of collateral.

3. Seller Financing

When dentists do not have sufficient borrowing capacity or wish to manage the time frames over which they assume debt, sellers may need to participate in financing.

4. Co-Signer

When dentists cannot secure loans independently or enter into associate buyout arrangements, they have the option to enlist the support of family members or friends. Recent graduates may draw upon this form of dental practice financing due to their high debt load from dental school combined with their lack of experience in practice management and loan repayment. Such cases call for a brutal honesty with respect to the borrower’s reasonable ability to service the debt and the lender’s reasonable ability to assume the risk of loss. All parties to loan default experience unpleasant side effects financially and emotionally. When such transactions involve intimates, the impact to relationships can be long-lasting.

When preparing a loan application, make excellence the hallmark of your efforts. Provide a complete application with all required schedules and attachments. Be your own advocate and make a compelling business case for your credit request. Offer written explanations for anomalies or potential lender concerns. Identify assets that can be pledged as collateral. Respond quickly to lender inquiries.

Access to credit correlates strongly with practice success. Make time to attend to this key aspect of your practice. Leverage outside expertise to help polish and present your personal and professional stories in the best possible light.