Do you understand everything that is in your dental loan? Dental transition experts Matt and Joe share what you need to know about your dental loan From amortization to working capital, Matt and Joe explain it all and what it means for your loan. They also discuss various offers a bank might offer and how they impact the dental loan.
Matt Scherer:
Hello and welcome. My name is Matt Scherer with PMA Practice Transitions and I assist dental professionals in selling and buying practices in the state of Ohio and Western PA. My colleague is…
Joe Gordon:
I’m Joe Gordon and I do the same in Indiana and Northern Kentucky.
Matt Scherer:
Today, we’re going to talk about what’s in your dental loan, understanding the terms of the loan and what everything means I guess. There’s really two types of lenders that we consider, right? There’s your dental lenders, your banks that lend on a consistent basis to dentists and then use your local banks.
Joe Gordon:
In doing transitions for the years, I was in public accounting, what always worried me most when I was selling a practice is I would always ask the buyer where they’re getting in their financing.
Matt Scherer:
Absolutely.
Joe Gordon:
And if it’s the First National Bank of the town that has one railroad track through it, I would immediately get worried because I knew I was going to have to explain everything to the banker because he probably has never financed a dental practice in his life and certainly, is probably more akin to financing of a farm or a combine then than he is a dental practice.
Matt Scherer:
Right.
Joe Gordon:
That’s why people exist like Matt who’s spent years in dental specific.
Matt Scherer:
Well, let’s break down the loan, I guess a little bit and what the terms mean. You really need to look at this information when you’re applying or getting a dental loan. There’s something called the, “term,” it’s the length of time that your loan is in play. Right? Fair enough.
Joe Gordon:
Yeah.
Matt Scherer:
And then there’s what’s called, “amortization” and that amortization is really a length of time that sets the payment or the amount of the payment. So you can have the longer the amortization, the lower the payment. So you can have a 10-year amortization loan with a five-year term. What that means is the amortization is setting the payment based on 10 years, but in five years, you have two choices once that loan is up. You can pay the difference that’s owed on the loan or refinance what’s left on the loan for another term. So you have to really be careful because a lot of times, banks will amortize alone and give you a shorter term, which means if in five years when that loan comes due and the practice isn’t maybe going as well or as you thought it would financially or things just aren’t right in the banking world and you’ve got to refinance that loan or pay it off, you could be in real trouble.
Joe Gordon:
You can be, and if interest rates climb on you during that period of time, that may spill some trouble when you go to refinance that loan.
Matt Scherer:
Oh yeah.
Joe Gordon:
That’ll be a large factor. Now, we don’t just go out and get a loan from a bank, Matt, just for the practice itself. What are some of the other things that are contained within that loan?
Matt Scherer:
Well, a lot of times, banks will give you either working capital or a line of credit. Some call it operating capital. The difference between operating capital and a line of credit is typically operating capital, there’s a set amount and it’s funded with the loan. So it’s in the loan terms, whether it’s a 10-year amortization and a 10-year term, and it’s payback over that time period. Whereas a line of credit is just that, think of it as like a credit card, right? If you don’t use your credit card, you don’t owe anything on it, you might have a limit of $10,000 on your line of credit. Well, you can use that line of credit up to the $10,000 and then you pay it back once it’s paid off and it’s done and you can reuse it again.
Matt Scherer:
I think the other big thing to look at is the rate versus the term. So the shorter the term, the lower the rate. When you’re comparing or trying to compare apples to apples on a loan, again, you’ve got to be careful with, “I’ve got a 10-year term and a 10-year amortization at 5%, and I’ve got a 10-year amortization with a five-year term at 4%,” right? The term is setting the rate. So what’s the better deal?
Matt Scherer:
That’s the thing. You can’t just look at the rate and say, “Oh, this is the better deal, so I better go with that.” And too often than not, as consumers, we’re price sensitive or rate-sensitive, all that good stuff. That’s the first thing we look at and we say, “Oh well, this bank’s giving me 4.5% and this one’s giving me 5%, so I have to go with this four and a half because it’s a better rate.”
Joe Gordon:
Well, my bank’s going to give me a loan for my practice and they told me I don’t have to make a payment for six months, so I could free money for six months, don’t I?
Matt Scherer:
Oh sure, you get free money, Joe. Little did you, but you forgot that interest is occurring during those six months that you’re not making your payments.
Joe Gordon:
It sounded too good to be true.
Matt Scherer:
In the banking world, we call that negative amortization. So what happens is if you took a loan today for $500,000 and didn’t have to make a payment for six months, all that interest is accruing. If you had to pay it off in six months, you might owe $510,000. You’re going to owe more than what you borrowed, so just be careful of that as well. Some banks offer interest-only payments, which isn’t necessarily a horrible thing. They may offer you a 10 year term with a one year interest only. You just got to know that after that interest only period, you’re not negatively amortizing the loan, but your payments for the next nine years are going to be a little bit higher.
Joe Gordon:
Right. Quite a few things to consider. The most important is make sure you match yourself up with someone who actually wins in the dental space-
Matt Scherer:
Absolutely.
Joe Gordon:
… and understands the nuances of dentistry and dentistry loaning.
Matt Scherer:
And the lowest rate isn’t always the best loan.
Joe Gordon:
No.
Matt Scherer:
Keep that in mind. If you want to talk to Joe or I a little bit more about financing, please don’t hesitate to give us a call. We appreciate you attending today and if you liked it, give us thumbs up and certainly share us with your friends and colleagues.
Published by Matthew Scherer on February 28, 2020