What a Lender Actually Looks At

Two files land on the same underwriter's desk in the same week. The first is a well-run practice with a long collections history and a buyer who has produced steadily for six years. The lease has under two years left and no option to renew. The second is a smaller, scruffier practice with a buyer whose numbers are merely fine, and a lease with a long runway and clean assignment language. The second one closes first, and the buyer of the first one spends three months wondering what he did wrong.

Most dentists approach financing as though the decision is about them personally, which is understandable and about a third correct. Underwriting is a sequence of questions asked in a rough order, and the answer to each one changes how hard the next one is. This article walks that sequence, explains what each piece has to show, and lists what to have ready before you pick up the phone. It does not quote rates, terms or ratios, because those move constantly and vary by lender, by deal and by month.

The Quick Answer

An underwriter is answering two questions at once: will this practice produce enough money to service the debt, and will this particular dentist keep it producing. The file gets read roughly in that order. Collections history and its quality come first, because the practice is the repayment source. Then your production history, because it is the best available evidence you can run the thing. Then credit, existing debt and liquidity, because they say whether you can survive a bad quarter. Then the lease, the equipment, and finally the projection and whether anyone believes it.

Weakness in most of those can be offset with strength somewhere else. Weakness in the lease is the one that most often cannot, because the lender is financing cash flow that happens at a specific address, and a short or unassignable lease means the collateral can walk away before the loan is paid.

Underwriting Is a Sequence, Not a Score

There is no single number that gets you approved. What happens is closer to a series of gates, each of which can be passed cleanly, passed with a question attached, or failed in a way that requires something else in the file to carry it.

Understanding the order matters because it tells you where to spend your energy. Borrowers routinely obsess over their credit score, which is usually a pass or fail gate rather than a sliding scale, and ignore the lease, which is the thing most likely to add two months to the timeline. If you are still choosing between buying something and building something, our comparison of startup versus acquisition covers how the financing question differs between the two, and financing a practice startup covers the ground-up case specifically.

The Practice: Collections History and Its Quality

The headline number is easy to get and tells you very little. What underwriting is really assessing is the durability of that number under new ownership.

Trend comes first. Three years plus a trailing twelve months, and what the shape of it says. A practice declining slowly is a different file from one that dipped for a known reason and recovered. Then the composition: how much comes from hygiene versus the doctor, how much from a narrow band of high-value cases, and how much from a small number of payers or a single employer group in town. Concentration of any kind is a risk flag, and a practice where one employer's plan drives a large share of the schedule carries a risk that has nothing to do with dentistry.

Then the quality of the revenue itself. Payer mix and the write-off picture. The relationship between production, adjustments and collections. Active patient counts and new patient flow, which together tell you whether the practice is replacing itself. The age and tenure of the hygiene program. And, critically, provider dependency: if the seller personally is the practice, if patients come because of him and the schedule empties when he leaves, then what is being sold is not fully transferable and the underwriter knows it.

Where the numbers have to agree

Four sources should tell the same story: the tax returns, the profit and loss statements, the production and collections reports out of the practice management software, and the bank deposits. When they agree, underwriting is quick. When they do not, the burden shifts to you to explain why, and "the software reports differently" is not an explanation anyone enjoys hearing twice.

This is also where sellers who have been aggressive about personal expenses run into their own history. Our guide to reading a dental practice P&L covers how those lines get normalized, and how dental practices are valued covers the add-back arguments that follow, which the lender will scrutinize just as carefully as the buyer should.

The Borrower: Production, Credit, Debt, Liquidity

Production history

This is the single most persuasive document a buyer can bring, and most buyers do not bring it. What did you produce and collect as an associate, monthly, over the last few years, in a form that came from a system rather than from memory. How many days a week were you working to do it. What did you keep in house and what did you refer out. A dentist producing well while referring out most of the procedures the target practice does in house has a projection problem hiding in plain sight.

A new graduate with no production history is not disqualified, but the file has to lean harder on everything else, and this is one of the places where a specialty lender with dental experience tends to be more comfortable than a generalist.

Credit, existing debt, and liquidity

Credit is usually read as a gate plus a narrative. The score matters, and so does the story behind anything ugly: what happened, when, and whether it is resolved. Student debt is normal in this industry and lenders are used to it, but the monthly obligation is real and how it gets counted varies by lender and by repayment plan.

Existing debt means everything: mortgage, vehicles, other practice debt, personal guarantees you signed for somebody else, and whatever a spouse's situation adds or removes. What underwriting is building is a picture of every dollar that has to go out the door each month before the practice's profit reaches you.

Liquidity is where quiet files die. The question is not whether you have a down payment; it is what is left afterward. Post-closing cash has to cover working capital, payroll through a transition, the gap between when you start producing and when payers start paying you, and your own living expenses through months when the draw is thin. A borrower who empties every account to close is a borrower with no margin for one slow quarter, and underwriters have seen how that ends.

The Lease, and Why a Strong Practice With a Bad One Is a Hard File

Here is where experience saves you months. The lender is financing cash flow generated at an address. If the right to occupy that address is shorter than the loan, or can be terminated, or cannot be transferred to you without the landlord's goodwill, then the thing securing the loan is less secure than it looks.

What gets read closely:

• Remaining term and options. Whether the term plus exercisable options runs at least as long as the financing, and what triggers each option.
• Assignment. Whether the lease can be assigned to you, on what conditions, and whether the landlord has consented in writing. Landlord consent is routinely the longest pole in the tent, and it is the delay nobody schedules for.
• Landlord cooperation on the collateral. Whether the landlord will sign the consents, estoppels or waivers the lender wants regarding equipment and leasehold improvements in the space.
• Termination, relocation and demolition clauses. A clause letting the landlord move you or end the lease for redevelopment turns a plumbed, built-out dental suite into a very expensive problem.
• Escalations and pass-throughs, because occupancy cost feeds straight into the projection.
• Personal guaranty terms, which are a negotiation of their own.

If the seller owns the building, the lease question becomes a purchase question, which is a different and often better conversation. Our chapter on dental office lease terms that matter covers the clauses in detail, and it is worth reading before you ask the landlord for anything, because the request order matters.

The Equipment, and What It Is Worth to Somebody Else

Hard assets are a small fraction of what you are paying for in most practice purchases, and lenders know it. Equipment still gets examined for three reasons.

First, as secondary collateral: what is here, does it work, and what would it realistically bring if the lender ever had to sell it. Second, and more practically, for existing liens. A search for filings against the seller's business frequently turns up financing or a lease the seller genuinely forgot about, and those have to be resolved at closing. Discovering one late is a scramble; discovering one early is a line on a closing statement.

Third, for what it implies about the years ahead. If the compressor is ancient, the vacuum is on borrowed time and half the operatories will need attention soon, the projection needs room for capital spending, and a projection with no capital line reads as naive. This is the same analysis a careful buyer should be doing anyway, and our practice due diligence checklist covers the ground.

The Projection, and Whether Anyone Believes It

Borrowers lose credibility faster here than anywhere else in the file. The tell is always the same: a projection where collections rise from month one, nothing dips at transition, overhead runs lower than the practice has ever achieved, and the owner's draw starts immediately.

A projection that gets taken seriously has friction in it. It shows a dip at transition, because patients notice when the dentist changes. It shows collections lagging production while credentialing catches up. It states the seller's post-sale role honestly rather than assuming a handoff that was never negotiated. It staffs the hygiene schedule at the days actually worked. It pays the team what you will actually pay them, which is often more than the seller paid. And it carries debt service, capital spending and your own draw as real lines rather than as rounding.

One buyer's model, invented figures

Example only. Build your own with your own numbers. A buyer models a practice collecting $85,000 a month. He assumes a dip to $72,000 in the first two months as the transition settles, then a climb back over the following quarter. He also assumes that for the first stretch, roughly a quarter of his production sits in accounts receivable longer than normal while credentialing completes, so collections trail production by more than the historical pattern. Adding those two assumptions costs about $40,000 of cash across the first half year compared with the naive version of the same model. That is the difference between a comfortable opening and a nervous one, and it is entirely invisible in a projection that starts at full speed. Your practice, your market and your payer mix will produce completely different figures, so run the model rather than borrowing this one. Our practice acquisition loan calculator is a reasonable place to test what different structures do to the monthly number.

Specialty Lenders Versus a General Commercial Bank

The lending market for dental practices is not one market, and the same file can be read very differently depending on who is reading it.

What to Have Ready Before the First Conversation

One more item that is not a document: a two-minute version of your story. Why this practice, why this town, what you intend to change and what you intend to leave alone. Underwriting is a paper process, but the person presenting your file inside the bank has to be able to describe you convincingly to people who will never meet you.

THE CHAIRSIDE TAKE

Get the lease in front of somebody who reads leases for a living before you fall in love with the practice, because that is the item most likely to cost you the deal or three months of your life. Build the projection with a transition dip and a credentialing lag in it, and let the lender see that you built it that way on purpose. Keep more cash after closing than feels necessary. Talk to at least two lender types, and ask each one what would make them say no. A prepared borrower with a clean package and an honest model gets better treatment than an impressive borrower who arrives with a number in his head and a folder he has not read.

Educational content only. It is not legal, financial, tax, or clinical advice. Prices and ranges are approximate and vary by region, condition, and year. Verify current rules with your state dental board and qualified professionals. ChairsideSource is not affiliated with any manufacturer, the ADA, or the DAT.