The first step
Buying a practice is an exciting process and, to ensure that no complications arise further down the line, it is crucial to ascertain your budget before anything else. This means estimating how much you can afford and therefore how big a loan you are likely to have access to. In order to approve a loan, banks and lenders must test whether repaying the sum is feasible for you. Essentially, you’ll need to demonstrate that, alongside repaying the loan, you can still maintain your current standard of living.
Income
There are many different reasons why a loan would be unserviceable; one reason could be that your predicted income as a practice owner may differ to your current income. For example, if you were previously earning £90,000 and the expected drawings after your purchase are anticipated to fall to £60,000, the bank or lender may not lend to you, based on this reduction in earnings, because they might fear that you’ll be unable to maintain your standard of living at the lower income. However, if you generate income elsewhere or can convince them with a strong and fully costed business plan, this may help to bump your earnings back up to £90,000. You may rent a number of properties, for example; this alternative source of income would demonstrate that you could pay back the loan and maintain your current standard of living. Income, whether it’s changed or not, is just one factor that’s considered in the ‘stress-test’.
Future serviceability
‘Stress-testing’ is a financial model used to check if you could afford a higher interest loan with your expected financial situation. Due to the repercussions of the coronavirus outbreak, the Bank of England (BoE) base interest rate at the time of writing was lowered to 0.1%, which is the lowest it’s ever been. As this is likely to go back up as the economy gets back on its feet, banks and lenders want to ensure that you could still repay the loan they provide you.
For instance, if the over base rate is 3%,[i] then banks or lenders would stress-rate loan repayments at 6.5% interest, to assess whether you could still afford the repayments.
If you were unable to pay back the loan at a higher interest rate, the bank or lender may not lend to you. The same can be said if you had a significantly-reduced disposable income, as in the earlier example, as this would negatively affect your standard of living.
Combining a cash deposit with equity
Not only should you be able to maintain an affordable lifestyle, but also the requisite cash funds to use as your deposit contribution. The size of deposit can be influenced by numerous factors. For instance, when buying an NHS or mixed practice valued at below £500,000, a 10% deposit contribution on the goodwill of the business is usually required.
For the equivalent practice (mixed or NHS) valued over £500,000, the deposit contribution may increase depending on the practice, the experience of the applicant and the opportunity itself.
When to comes to private dental practices, a higher deposit may be needed if the applicant doesn’t have a background in private practice or cannot convince the bank of their likely success. This is because they are seen as higher risk to lenders – unlike a practice with an NHS dental contract, they don’t have any amount of guaranteed income. In this situation, a buyer may need to produce a 20%-25% deposit.
It’s important to note that for all of the aforementioned practices, you may not need to present the deposit all in cash funds. In fact, as long as you meet the loan-to-value criteria of that lender overall (e.g., 80%), you can combine your cash sum with the equity or lending value from any property you own.
For example, if the asking price of a mixed practice was £600,000 and the loan-to-value was 80%, then a deposit of £120,000 would be required. This could come in the form of £60,000 in cash and £60,000 in equity/lending in any property you own. Equally, you may wish to provide £70,000 in cash and the remaining £50,000 in equity/lending in any property you own.
For a mixed practice valued at £450,000, with the loan-to-value at 90% and the deposit at 10%, then you’d need a deposit of £45,000. This can come in the form of two payments of £22,500, one being in cash, the other in equity/lending in any property you own.
You can improve your loan terms by putting up your equity or assets to support the deposit. If the banks or lenders believes you are offering a more serious commitment and security on the transaction, your chances of a successful credit application will be higher.
Choose expert advice
Understanding what you can and cannot afford is crucial when navigating a dental practice purchase. Receiving expert advice from a professional broker will help you gain perspective and clarity, and aid you in taking your first steps in obtaining your dental practice. DE Finance will help you to analyse your assets and liabilities, check the affordability of your chosen dental practice, give you a bespoke lending proposal for the banks and manage the transaction, for your peace of mind.
For more information contact Dental Elite. Visit www.dentalelite.co.uk, email info@dentalelite.co.uk or call 01788 545 900
Medical Elite Recruitment and Practice Sales Ltd t/a Dental Elite and DE Finance is authorised and regulated by the Financial Conduct Authority, reference number 703384. Medical Elite Recruitment and Practice Sales Ltd t/a Dental Elite and DE Finance is a credit broker and not a lender. All finance is subject to status and income. Written Quotation will be provided on request. Medical Elite Recruitment and Practice Sales Ltd t/a Dental Elite and DE Finance can introduce you to a limited number of finance providers and may receive a commission for such introductions. Company Reg No. 07345687
Please note that if you do not make loan repayments in accordance with the terms and conditions of the loan provided to you, your assets may be at risk of seizure and sale, and/or all of the funds lent to you may become repayable immediately.
[i] Based on Base Rate at time of writing of 0.1%