money matters
MAKING
THE RIGHT
CHOICE
ON DENTAL
LOANS
M
by Scott Beard and Derek Rawnsley, Pacific Continental Bank
any of us are familiar with the concept of loan duration and understand that for many things (houses,
cars, etc.) the longer the loan duration, the less the
monthly payments will be. For dentists however, a longer term
practice loan could offer a mirage of affordability.
Back in the 1990s, most dental loans out there were about five
years. This was a very reasonable relationship between debt and
time. And, as banking relationships have evolved, that common
loan duration has stretched first to seven years and then to
about 10 years.
20 NORTH TEXAS DENTISTRY | www.northtexasdentistry.com
However, during the last few years of the Great Recession,
loan terms have greatly increased, and today it is not uncommon for some lenders to offer dental loans with 15 or even up
to 20 years.
And while such loans allow for smaller monthly payments, the
end result of total interest paid over the course of the loan, or
significant losses in the event of the need to sell due to an
unforeseen event, should give dentists pause.
In almost every case, a shorter term loan is the proper course
of action for dentists who wish to have manageable monthly
payments, lower interest payments and tangible profits.
We’re going to compare three scenarios to illustrate our point.
Scenarios #1 and #2 assume that a dentist owns his/her practice, has a loan and will have to sell sooner than expected for
personal reasons. Further, the practice when purchased was
bringing in around $1 million in collections.
Scenario Assumptions:
n Practice collections: $1,000,000
n Sales price: $750,000
n Seller has a 10-year loan at a 5.00% interest rate
or 15-year loan at a 5.50% interest rate.
n Seller pays a 10% brokerage commission on sale
of the practice.
n Seller pays 20% in taxes from the sale.