Dental Practice Loan Underwriting: Prepare the Evidence

What is the lender trying to understand?

A lender needs to know how the loan will be repaid and what could disrupt that plan. It reviews the buyer's skills and debts. It also reviews practice earnings, clinical coverage, premises and planned changes. A dentist with strong personal finances can still choose a practice that cannot support the proposed debt.

ADA acquisition guidance distinguishes application, underwriting and the buyer's discussion with the lender. It describes a review of both the target practice and the dentist's readiness. Tell the seller which stage has been reached. An early lender call does not mean that the target purchase is funded. (Source: ADA: How to purchase with confidence.)

Request the lender's own checklist and definitions. Banks may request different periods, earnings changes, cash reserves and proof. Use this guide to prepare. Each lender sets its own review needs and decides whether the borrower qualifies.

How should you organize the lender package?

Make a file index. For each file, record its name, period, source, version and owner. Keep the original financial reports apart from your adjusted model and forecast. Label incomplete items instead of substituting an estimate without explanation. Send private records through the secure channel approved by the lender.

There is no single required history or review time stated here. Ask the institution what it needs for the specific program and deal. If a report is missing, explain why. Ask what other evidence the lender can accept. Do not fill the gap with an invented history.

How do you reconcile the practice cash flow?

Start with consistent periods across practice-management collections, accounting revenue and bank activity. Explain refunds, card fees and payments from patient-financing firms. Also explain timing and accounting-basis differences. A gap may have a reasonable explanation, but it should remain visible until supported.

Then identify the operating costs required after closing. Owner compensation, related-party rent, vacant positions and nonrecurring expenses need careful treatment. Show each proposed adjustment and its evidence. Removing owner pay can overstate earnings if someone must still do that work. Budget the required replacement labor.

Use the production and collections guide to define reports and the valuation guide to organize the earnings bridge. A lender may use its own cash-flow measure. Show how your model maps to that measure and where the definitions differ.

What does a complete sources-and-uses budget show?

Sources describe where the money comes from. Uses describe where it goes. Both sides should reconcile to the same total, while a dated cash schedule explains when each source is available. A balanced total can still hide a timing problem if funding arrives after a required payment.

Consider this hypothetical budget, included only to illustrate the structure. It is not a lender proposal or an indication of required equity.

The proposed loan may not cover every category shown. The lender must confirm allowed uses, the buyer's cash contribution and conditions for release. It must also assess the reserve plan. The buyer must also decide what personal liquidity remains after contributing cash. Do not treat an undrawn or unapproved facility as money already available.

Check for omitted costs and double counting. A deposit already paid may reduce the closing payment rather than become an additional purchase expense. Equipment included in the asset price should not be budgeted again unless the second amount is a separate repair or replacement. A CPA can help reconcile the closing statement with the model.

How should you model debt service and owner income?

Keep loan principal and interest separate from the operating-earnings measure. Principal repayment consumes cash even though it is not an operating expense on the P&L. Depreciation affects accounting earnings differently from the actual cash used to buy equipment. A cash-flow budget must address both distinctions.

Consider an invented annual cash budget of $320,000 before purchase debt, owner draws and capital reserves. Subtract $135,000 for principal and interest, then $30,000 for planned capital needs. That leaves $155,000 before personal tax and any further cash retained in the practice. That residual still needs to compensate the owner for any clinical work omitted from the expenses. It is not an automatic investment return.

Ask how the lender defines its coverage ratio. Confirm which cash and debt figures it uses, for which period and against what threshold. This site does not state a universal debt-service coverage requirement for dental acquisitions. Two parties can calculate different ratios from the same practice because they treat owner compensation and debt obligations differently.

Use the loan payment calculator with the proposed amount, rate and term. It assumes regular fully amortizing payments and does not model every fee, variable-rate reset or irregular disbursement. Reconcile the result to the lender's actual repayment schedule before relying on it.

Which downside cases deserve attention?

Test specific disruptions that could affect the proposed acquisition. Test late payer receipts and fewer seller workdays. Also consider an empty hygiene role, unplanned repairs or higher rent. Tie each case to a finding from the review. Do not cut every line by an arbitrary percentage.

Distinguish a temporary cash delay from a recurring profitability problem. More working capital may address the first, while the second can require a different operating plan, price or financing structure. Borrowing more does not automatically solve a practice that cannot support ongoing expenses and debt.

Does advertised 100% financing settle the cash question?

No. A lender's maximum advertised financing feature describes a program subject to qualifications and underwriting. It does not mean every cost is eligible or that no cash reserve is needed. The borrower must still qualify.

Huntington advertises financing for eligible dental practice needs, including up to 100% financing within its offering. Confirm the exact proposal for your purchase. Bank of America also offers a dental lending program. Compare the written terms; each bank may assess the deal differently. (Sources: Huntington: Dental practice loans; Bank of America: Dental practice loans.)

For SBA 7(a), the SBA identifies repayment ability and creditworthiness among its requirements, and eligible uses can include ownership changes. The lender must apply the program requirements and effective rules to the proposed structure. Do not assume SBA backing removes borrower obligations or substitutes for underwriting. (Source: SBA: 7(a) loans.)

What questions should you ask when comparing proposals?

Request the amount, rate basis, term and payment schedule. Then compare fees, security, guarantees, buyer cash, reserves and early-payment terms. List any conditions still open. Ask which quoted terms can change and what triggers a change. A lower stated rate may accompany a different fee or payment structure.

Confirm whether working capital and equipment are part of the same facility or separate arrangements. Find out when funds can be drawn and when unused credit expires. If property financing is involved, coordinate the practice and real-estate transactions without assuming that approval of one guarantees the other.

Keep a comparison sheet and a list of unresolved questions. Send material changes in purchase terms or operating assumptions to the lender promptly. If the final deal changes, ask whether the lender must review it again.

What needs to happen between approval and funding?

Ask for the remaining closing-condition list and an owner for each item. The list may cover final papers, premises, insurance, entity details and proof of cash. The lender may require other items for this loan. Use the lender's actual list; this guide does not define a universal closing package.

Coordinate the expected funding date with operating readiness. A signed purchase agreement does not settle every operating need. Confirm the premises rights, payer work and access to systems separately. Likewise, an operational plan does not prove lender conditions have been satisfied. Both workstreams must converge.

Protect the final funding process through approved channels. Confirm payment instructions with the professionals managing closing and follow their verification procedure. Keep a final sources-and-uses schedule that reconciles to the agreed documents, including deposits already made and amounts retained for operations.

How can you make the first lender conversation useful?

Bring your professional background, personal debt and liquidity overview, target-practice summary, expected purchase structure and questions about the opening budget. If the practice has not been selected, ask which preparation steps will make a later application more complete. If it has, explain what is known and what remains under review.

Use the conversation to identify missing evidence, program fit and the next decision. Then coordinate the resulting requests with the seller through the agreed confidentiality process. A complete and consistent package helps everyone understand the proposed purchase, while the lending decision remains with the institution.

Common mistakes in an acquisition loan package

A common error is sending different versions of the deal to different people. The CPA may use a revised rent figure while the lender still has the old lease cost. The seller may assume a cash purchase of assets while the buyer's budget includes a seller note. Add a model date to each package. Tell the lender which changes affect price, costs or funding sources.

Another error is counting the same cash twice. Suppose a buyer has set aside funds for closing costs and also lists those funds as the practice's opening reserve. The total sources may balance on paper while the reserve is already spent. Give each dollar a single use and show when it leaves the account.

A monthly cash test for delayed receipts

This invented example shows timing risk; it is not a forecast for a dental practice. Begin with $60,000 in operating cash. Assume normal monthly receipts of $90,000 and required cash payments of $80,000. If $25,000 of receipts arrive a month late, the first month ends with $45,000 rather than $70,000.

The $25,000 gap is a timing need only if the money is later collected. If it is never earned or cannot be collected, the model needs a revenue change as well. Do not solve both cases by adding the same amount of short-term borrowing without checking the cause.

List the payments that cannot wait: payroll, rent and scheduled debt, for example. Confirm whether the financing proposal supplies usable cash before those payments fall due. Repeat the cash test over the months affected by the specific transition concern. A positive annual total does not prove that each month's bills can be paid.

Keep the funding status precise

Use the lender's own written status. Record what is approved, which facts it assumes and what remains open. If an approval depends on final lease terms, mark that condition as open until the lender confirms it is satisfied. Avoid telling the seller that funding is complete when a key condition still needs review.

Summary: make the repayment story reproducible

A useful package connects the buyer's skills, the practice's reported results and the cash needed to close and operate. It shows how adjustments were made and how downside cases affect cash. Keep the lender's conditions visible through closing. Then make a separate personal decision about whether the practice supports the work and income you want.

For a dated opening-cash bridge and a collection-delay test, use the working-capital planning guide.