Purchasing or starting a dental practice will be one of the largest financial decisions of your professional career. It is important to work with a bank that understands the specific financial needs of the industry.

Once you have decided on the bank(s) you want to work with, you will be asked to submit various financial documents for the bank to review. Assuming the loan opportunity is approved, the bank will issue the terms of the loan in a formal commitment letter. Upon receiving the commitment letter(s) from the lender, you will want to compare them to see the differences.

There are a few major points to review closely:

• Amount approved
• Term and amortization of the loan
• Type of loan
• Collateral
• Interest rate
• Pre-payment provision
• Loan fees
• Guarantors
• Funding or expiration dates
• Loan closing conditions

Amount Approved: This is the dollar amount the bank approved. The bank may approve 100{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a} financing for a purchase or start-up, however, depending on cash flow, they may finance less than the purchase price and ask the seller to hold a note back. The bank will often provide a line of credit to help cover the first several month of operations until collections are received by the practice.

Term and Amortization: This is important to understand. This is the length of the practice note as well as the repayment period. Many times these are the same in the instance when the term is shorter than the amortization. This creates a balloon payment.

Type of Loan: Most practice loans are usually structured as term loans with regular monthly principal and interest payments due or lines of credit with only required interest payments due.

Collateral: With most loans, the bank will require an All Business Asset filing of the practice to secure the loan. This will require an assignment of life insurance on the owner in the amount of the practice loan.

Interest Rate: Typically, most practice loans have a fixed interest rate. In the instance of a line of credit, they may have a variable interest rate. Additionally, some banks may only be willing to offer a fixed rate for a time frame that is shorter than the term of your loan. In this instance, the interest rate may re-price or change after this initial fixed rate period. It is important to understand the difference.

Prepayment Provision: Penalties applied to the loan for either early pre-payment or refinance. Make sure given your unique circumstances or plans for the practice that you understand the impact.

Loan Fee:  Any applicable loan fees the bank may charge for the loan. This might be negotiated if additional products are used such as a business checking account or merchant services.

Guarantors:  The guarantors are required to sign on behalf of the loan. This may vary depending on the cash flow of the practice, however, it will usually include any owner that has a 20{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a} or greater ownership interest in the practice.

Funding or Expiration Dates: When the loan must close by and how long the commitment letter is valid.

Loan Closing Conditions: The items the bank needs in order to close the loan after the commitment letter has been accepted. This might include: a copy of the office lease, the legal entity documents for your practice, a copy of the purchase contract or any invoices from vendors that need paid, evidence of various forms of insurance, a copy of your active dental license and a clear lien search on your and the sellers practice entity.

In summary, make sure you understand all terms within your commitment letter and do not focus solely on the interest rate. While certainly important, making a loan decision based on the rate, without understanding how the other terms of the loan may impact your business and create future challenges. It is often beneficial to have your accountant or attorney assist in reviewing the complete terms of the loan, as not all commitment letters are the same. Occasionally, a lender may have some leeway on some of the terms (such as loan fees or interest rate) and may be able to offer better terms if additional bank services or products are used in conjunction with the loan.

Justin Baker is a Healthcare Relationship Manager at First Merchants Bank. He has been providing financial solutions to healthcare clients for more than eight years. He can be reached via email at jrbaker@firstmerchants.com.