Getting a practice purchase loan. What you need to know to get approved

Specialty lenders have been far less impacted compared to the drastic changes in the mortgage industry. However, there has been more scrutiny in reviewing loans and the backup paperwork. Some lenders have revised their guidelines based on the performance of other business loans unrelated to optometry. While some of this may be knee jerk reactions, Buyers and sellers can take certain actions to increase their chance of getting a loan.


I recently attended a conference with a lender who provides loans for all medical practices including optometrists. The performance of their portfolio in all divisions often dictates what type of risk they will take. This particular lender prefers smaller loans because it spreads the risk out over more people. (i.e. They might prefer three $350,000 loans than one million dollar loan).

Another lender may prefer larger loans of one million or more because every loan requires the same amount of paperwork. Larger loans will earn them more money.

Essentially each lender has their preferred loan criteria. A decline or approval may not have anything to do with the buyer’s credit or the value of the seller’s practice. With that in mind here are several tips to increase your chance of getting the best loan.

1. Ask the lender what the average size loan they have in their portfolio. Also ask the minimum and maximum loan size.

2. Determine if a down payment is needed. If yes, can it be in the form of a seller’s carry back or do they require a minimum down payment from the buyer.

3. A declined loan doesn’t mean you have bad credit or the seller’s practice is “bad”. It simply means that it doesn’t meet the lenders credit rules. Another lender might have different rules.

4. Rate: Most lenders rates vary within about 1%. For smaller loans this has little impact on the payment. We suggest you focus on customer service (i.e. turnaround time), prepayment penalties payment terms length, etc) For example; a one percent difference on a $300,000 loan might be about $150 month comparing 7% - 8% and 8% - 9%. We are not suggesting you pay more – but that you focus on the “Big Picture”

5. Ask about the minimum FICO score needed.

6. Go to www.freecreditscore.com and review your credit profile.

7. Pay all you loan and credit card payments on time, especially student loans.

8. Get a 10 year term life insurance policy now before you identify a practice to buy. Most lenders will require life and/or disability insurance. This can take up to 2 months and might delay closing. To give yourself an edge over other buyers, get at least a 10 year term life policy for $500,000 - $1,000,000.

9. Prepare a cover letter describing your experience and responsibilities in previous jobs. Lenders are looking for confidence in a buyer. Buyer’s should not be overconfident, but should exhibit some know how in running a practice. Your cover letter should also include steps you’ll take to grow the profits and revenues.

10. If the practice has a smaller gross be prepared to work a second part time job or show that your spouse has a second income. Lenders are focused on cash flow and the ability to pay your personal debts and repay their loan. If the practice doesn’t have enough profit, you’ll need to provide proof of secondary income.

11. Seller’s revenue: Get 3 years of monthly gross cash collections from the seller. Many practices in 2009 had revenues that were down 10% or more. The current value may be different today than last year. However, lenders need to determine that the revenue is not spiraling down to zero. Three years of monthly gross collections (cash) will help you and your lender see seasonal trends and adjustments.

12. Reduced gross vs. profit: While the gross may have been down from the prior year, determine the current profit. Has the profit remained the same? If so what expenses were trimmed? Many owners have cut the “fat” from their offices.

Getting a loan for a practice takes more time than simply buying a new car. The key to insuring a good experience is in providing the lender with a complete package upfront and in getting any requested items immediately. Here a few items steps you’ll encounter in applying for the loan and in moving through the approval and funding process.
1) Sign a credit application for the lender

2) They check your personal credit.

3) They issue a proposal for the estimated terms (not an approval)

4) You sign the proposal and provide a small deposit to get to the final approval

5) Most lenders will schedule a phone interview with you. They want to make sure you understand and have the confidence and experience to be an owner.

6) Make sure the deposit is refundable if you are not approved with the terms from the proposal

7) Submit a complete package including your info and the seller’s information and signed letter of intent of purchase agreement

8) Final approval or decline usually can take up to 3 weeks. Delays are caused by incomplete packages.

9) Ask about the funding process, requirements and the timeline.

10) Your lender will check if the seller has any outstanding loans or leases. They’ll need to be paid off at closing. Getting payoffs could delay the closing.

11) Outstanding tax liens or payroll taxes by the seller might kill the transaction.

12) A decline: Ask why. A decline is not because the practice is “bad”, but that it does not fit their credit rules. Another lender might have different credit rules.

13) The approval: Read the conditions of the final approval. There are often requirements needed such as a minimum premises lease term, insurance, etc

14) Remember some requirements are rolling deadlines. For example: seller financials (P&L) not more than 90 days old are required. That means if the closing is delayed after the final approval –you’ll need to get updated financials from the seller.