Banks aren’t the only ones who can loan you money! If you’re buying a dental practice, it’s possible that the selling dentist could be involved in the loan process as well, as a lender. While it’s less common than a standard bank loan, it could become relevant in your purchase process. If it is, here’s what you need to know.
Is seller financing in play because I won’t get approved for a loan?
It’s not you, it’s them. I’ll get into more of the common reasons for seller financing below, but I can say that it’s not likely that you won’t be approved for a bank loan, as long as you meet a few basic requirements. More likely, it’s about the practice itself not being approved for the loan because the bank sees it as lacking in some way.
How likely is it that I’ll need seller financing?
Not terribly common. And it’s usually not about you at all, but rather about the practice itself. If the practice isn’t up to the standards the bank has for practice loans, they may ask the seller to step in. If you want to avoid seller financing (it does make things more complicated), then the best thing to do is to find a great practice to buy. That’s where we come in.
Does the seller lend the whole amount?
It’s possible. But what I see most often is that the bank is uneasy about financing the loan and wants the seller to step in as a minority lender. This gives the seller some skin in the game, and can reassure the bank that everyone is confident in the transaction. So, to use a hypothetical, if there was a $500K practice that the bank wasn’t thrilled about, they might ask that the seller put up, say, $200K of that loan, while the bank covers the rest.
What does the seller get for this?
Obviously, the seller is trying to sell their practice! If the practice is subpar for some reason, as mentioned above, this might be the only way they can offload it.
It happens sometimes that I see a seller’s CPA recommend that they finance the buyer’s loan. This is usually for tax purposes, which I won’t get into here, but which can save the seller some money in the long run. The seller would need to be pretty confident in you as a buyer to take this leap.
Are the seller’s loan terms worse than a bank loan?
It depends so much on the seller’s decisions, so I don’t have a clear answer on this one. About half the time, I see stiffer terms from seller financing, and the other half they’re the same as the bank’s terms.
Seller financing can be tricky to navigate, so the best thing you can do if you come across it is to have a good team in your corner, including a good dental acquisitions attorney and an experienced accountant and buyer’s team (like yours truly). If you have questions on this subject, please don’t hesitate to reach out to Dental Buyer Advocates.