by Why finding the right banking partner is critical to securing the kind of debt financing that your practice needs to grow.
By Pete Mercer
Securing financing for a business venture is always a complex process that requires due diligence on both sides of the equation. This is especially true of healthcare and dentistry, because of the extra compliance regulations that other industries might not have.
Securing financing through debt
Even though the dental industry has proven in the last 12 to 15 months that it’s bounced back from the pandemic, bank appetites don’t bounce back as quickly. Most banks won’t have the appetite to lend in that kind of environment where there’s a lot of uncertainty in the financial markets.
One approach DSOs can use is private equity debt funds, which differs from private equity investment funds where they are purely placing debt and not taking an equity stake in the DSO. This approach has pros and cons to it. One of the pros is that since they are not a commercial bank subject to all the regulation that banks are, they allow higher leverage. They also understand risk on a more granular basis than banks, which can help you to get higher facility amounts.
The downside is that it’s a higher risk and more expensive. Private equity investment funds have much tighter and more comprehensive reporting requirements as well. With debt funds, they want monthly financials and monthly certifications, requiring a different data set than most banks. Not only the balance sheet and income statements, but they want a statement of cash flows. Your organization may need financial reporting expertise to provide that information. Additionally, where a commercial bank might have about five questions for you with each reporting package, you should expect to get 10 to 20 questions each month that will require granular explanations.
What it takes to raise debt funds
The most important attribute to have is a proven track record, which is tougher for emerging practices. Some groups might be running up to five practices really well, but once you get up to 10 or 15 practices, it’s a completely different animal. The traditional bank debt route is going to be more restrictive on the amount of capital that they will give you. They have a much lower risk tolerance, so it will be a much slower process to get things moving.
These institutions will also be looking to see if your DSO is compliant on a regular basis, regarding things like legal structure, management agreements, and operating agreements. That gets even more complex because regulatory requirements vary by state – so if you’re operating in multiple states, they will be checking differing qualifications for compliance.
Finally, the bank will want to ensure that there are no cash leakage points within the structure of your organization. If there are leakage points, that cash will still need to go back to the DSO to pay that credit facility back.
There aren’t many DSO specific lenders out there, especially when you consider that healthcare is a specialty lending industry. Dentistry is a niche within healthcare, which makes DSOs a niche within a niche. For banks to execute on DSO lending, you need to find DSO specific healthcare experience lenders to be able to run that group for you.
There have been plenty of stories of banks that have gotten into the DSO world, but they try to use regular GNI lenders – generalists that are being pushed to work within the highly specific healthcare lending space. The next thing you know, those banks have a portfolio of healthcare deals that are either poorly thought out or poorly structured. This leads to losses, and these banks are out of healthcare in a matter of years.
Finding the right banking partner is critical to securing the kind of debt financing that your practice can leverage into a growth opportunity. Doing your due diligence and having patience for the process is all a part of the journey.
