Practice Finance for Orthodontists

With the latest spectacular crash of the AA rated Icelandic banks, and the governments latest intention to effectively nationalise RBS and HBOS there is no doubt that the banking world is about to enter a completely new phase.

LIBOR (the rate that banks lend to each other) is still high, meaning banks have even less to lend as they can’t borrow the money either. And despite various government assurances and Bank of England cash injections there is still a huge amount of uncertainty in the banking sector. You might therefore be forgiven for thinking that as an orthodontist looking to set up or expand your practice you might struggle to get finance.

However, for the time being, the few banks that specialise in lending to dentists appear to be getting on with doing just that.

Lending criteria
The lending criteria and guidelines have not changed significantly from a year ago when the problems at Northern Rock kicked off this present banking crisis. The main area the banks are interested in is serviceability and whether you can afford to maintain the monthly loan repayments.

In that respect the criteria are not that different from a mainstream dentist. Typically the main difference is that orthodontic practices tend to have much higher income levels of which the majority tends to be NHS related with sizable contract values linked to the numbers of UOAs.

As a result of this, banks do look favourably on orthodontists and consider higher loan amounts and Loan to Values (LTVs) compared with a mainstream practice. So the fact that with the new contract, the income stream is now more regular, added to the significant levels of turnover has made getting finance even easier for an orthodontist.

Other than serviceability, the banks will want to know that your personal situation is stable. The key indicators of this are significant savings, equity in your main residence and other investment properties, and monthly net income higher than your outgoings.

The banks are also interested in your experience and you can evidence that with a CV. With all the additional qualifications required to be a specialist and general CPD, most orthodontists CVs are acceptable to lenders, but the more you can prove your expertise, the greater flexibility will be given to your finance requirements.

So has anything changed recently?
The main recent change is the actual cost of borrowing rather than the ability to borrow. Previously where interest rates were being negotiated at 1% above base rate with perhaps a 1% arrangement fee, this has now been pushed up to 1.75% above base rate and the fees tend to be even harder to negotiate. However with the latest Bank of England base rate cut to 4.5% this would still take the total rate up to only 6.25%, which is still extremely competitive for a commercial loan.

The new NHS contract
The new contract has typically worked out very well for most orthodontists whose previous problem was the sizable time lag between starting treatment and getting paid once treatment had completed, which could be 18 - 24 months later. Under the new contract there is a much more regular and steady income stream throughout the year which makes planning and budgeting much easier.

When a bank is lending, their main focus is on serviceability of the loan – how much of the profits will be available to pay the interest and loan repayments. So if you can provide accounts for previous years and management information for the current year, you’re far more likely to not only get 100% finance but be able to negotiate a competitive interest rate as well.

Reducing dependence on NHS
There is now an increasing number of orthodontists that are trying to reduce their dependence on the NHS ‘guarantee’ and increasing their private work, especially with the increasing opportunities with adults such as cosmetic and lingual treatment. However without the NHS income stream the banks will want to be sure there are sufficient private patients, referrals or marketing activity to ensure the continued serviceability of the loan.

The essential elements of your ‘Business Plan’
Banks do not always need to see a formal business plan. Typically for a purchase the bank is mainly interested in the accounts of the practice and the orthodontists’ experience. A newly qualified orthodontist might struggle getting finance to buy a multi practice surgery with several million pounds turnover even with an excellent business plan, whereas an experienced principal with several years of accounts illustrating profitability and therefore serviceability of the loan might not even need to complete one.

The important element when dealing with the banks is to do your homework – if you know what you’re talking about you’ll naturally be more confident and professional. I had a client once who wanted to create a dental surgery on the ground floor and several flats upstairs, but this was an issue for the banks as although they could see the client was a successful practitioner he had no experience as a developer.

You should therefore consider using a broker to assist you, as you may be offered better terms or an interview with a specialist manager.

Whether the banks request it or not it might be useful to confirm viability for yourself by writing a suitable business plan. Core elements in this plan for a purchase might include:

1. The sales particulars of the business in question - what the practice is costing to buy and/or refurbish. What are the reasons behind the sale?

2. Three years historic accounts for the business in question.

3. Forecasts and narrative for the next few years

4. Some background on the buyers own personal accounts.

Your personal account perspective can be easily identified as part of the ‘Asset Liability Income Expenditure’ outline that we recommend to all our customers. This ‘snapshot’ can demonstrate the sound platform upon which you wish to build. You can either prepare this statement yourself or your bank can help facilitate this with appropriate forms which can be completed fairly easily.

Generally speaking a bank will lend to a practice against a combination of the freehold property value, the practice’s ‘goodwill’ and its fixtures and fittings, so personal investment is not always necessary.

Key elements to feature in a business plan based on expansion rather than purchase might include:

• What do you want to achieve with the practice? What stepping stones do you need to take things forward over the next couple of years?

• How are you going to achieve these goals? What will you need to set-up, refurbish, upgrade or purchase in order to realise this and how much will this cost? This then need to be supported with financials including cash flow, profits loss and balance sheet forecasts. How do these fit into your forecasts?

• Where are your future patients/customers going to come from? – Can you acquire more commitment for the PCT? Will you be looking to convert them from the NHS to private plans or are there planned ‘local marketing initiatives‘?

• How are you going to differentiate your practice?

• Who will be working with you? Other Associates? What specialities do they offer? How will you practice be different from the competition? What will set you apart?

• Proof that you are a registered Specialist Orthodontist. This can be easily achieved by citing your registration number within the business plan.

Developing a robust business plan will often throw up new challenges and opportunities that you had not considered before. However, you can work many of these through with your bank or finance provider to find a bespoke financial solution to each one.

Calculating the financial realities
Once you have developed a business plan you will need to consider whether your funding request is financially viable.

Typically a bank will lend money against both the practice’s freehold – often up to 100% of the value - as well as up to 100% (or possibly more) of the practice’s existing turnover.

You need to ensure that you build into your calculations not only the interest costs, but also other key factors like your own income and capital costs.

The structure of your bank facilities
The structure of the facilities your bank will provide to meet a successful funding application will depend entirely upon your individual circumstances.

If the bank can provide the overall funding for the purchase or re-financing with a capital loan for a prescriptive period they will do so. A small overdraft, in case of need may also be provided to help cover any emergencies in the practice’s cash flow and banks readily work with specialist equipment providers when required. On the few occasions when the bank cannot provide enough traditional loan finance they may be able to help a dentist acquire an additional loan from an alternative source, such as lease finance on some of the equipment.

One of the unknowns in any business is future interest rate movements. To mitigate against possible rises the bank should explain to its customers the options around variable rate and fixed rate at the outset.

Working with the right partners to secure the right funding
Whilst the majority of orthodontists may have modest financial expertise, it will be a relief to learn that there are banks with specialist healthcare teams who can address this.

Once you’ve established a relationship with such a specialist bank over many years, and consistently repaid loans and overdrafts and maintained the interest payments, your bank will be far more likely to lend more aggressively on any proposed expansion plans. So although it might be tempting to switch lenders for a ½% reduction in rates, with the loss of goodwill and the additional fees to switch, you may well be advised to maintain your relationship with your current bank.

Your bank should also offer flexibility in its financial structures allowing it to fix rates for new entrants to create some security around initial repayments. Banks who view the dental sector as a key market will provide a prompt response ‘in principle’ to your funding application within 48 hours allowing you to move quickly and with confidence.

The banks will also tend to work with specialist valuers as they have their finger on the pulse of the dental marketplace and can accurately assess goodwill, equipment, fixtures and fittings.

In order to secure the best possible funding targeted to a dentist’s specific requirements, we recommend our customers work with specialist accountants such as a member of NASDA (National Association of Specialist Dental Accountants) or the ASPD (Association of Specialist Providers to Dentists) as they have a detailed day to day knowledge of the intricacies of dental accountancy and may be able to help by benchmarking your practice against the sector average.

Working with the right team of professionals will allow you to focus on working with patients, building your business and improving your skills, safe in the knowledge that your business has been established upon stable, financially viable and rewarding foundations.