Dr James, 0s:

Interest-only finance for dental practices are a thing, and we're here to learn all about those, how they work, the ins and outs and how they might benefit us with resident expert Chetan Jethwa. So can you confirm, Chetan? Are they a thing?

Chetan, 13s:

They are and literally I've got terms that came in about 20 minutes ago. So, as I mentioned, interest-only basically helps. Especially squat dental practices is what I'm looking at here. It helps them in the sense that when you're a new business, cashflow is a key issue initially when you're starting. So if you can have interest only for the first 12 months, why not? It helps understand your bills, your secretary bill, your nurse bill, whatever other expenses that are coming through, because you might not have an existing client bank that you've got because you're not buying an existing practice. It's a squat practice. So, because you're building your business, that first year is key. So, yes, we can get interest only finance options and it's just a matter of understanding what's in the background so we can make it work for the practice owner and for the lender.

Dr James, 1m 0s:

Let's jump into that in two seconds and before we do, I guess a nice place to begin might be just defining how an average loans repayments look versus an interest only loans repayments look. I know this is like day one of mortgage school, presumably, or day one of finance school, something along those lines, but if we start there, that's a good place to navigate from there.

Chetan, 1m 24s:

that's a good place to navigate from, okay. So let's give you an idea. So if someone's borrowing I don't know, say £250,000, and that £250,000 is done over a 20-year term, for example with a rate of 8% session base rate plus 3%, so we're looking at 8% rate. Now if we were to do that on interest only, all you're doing is servicing the interest for the first 12 months, which is £1,666. That's quite reasonable. But let's go back now and put that onto repayment of a 20-year term. That £1,666 becomes £2,091. So effectively you're paying nearly enough. What £350 to £400 extra? That £400 could help in that first 12 months. It's an option you have. You could go straight down the route of saying I want capital repayment from day one because I know I can afford it. But sometimes, when it's a new business, it's hard to make those judgment calls because it's all based on projections.

Dr James, 2m 15s:

Right, I see so you're saving on the. You're just purely paying back the principal for the first 12 months, in other words, Interest only.

Chetan, 2m 22s:

So you're paying interest on the capital borrowed for the first 12 months, oh, other way around. You're paying capital and interest. So the loan itself would be paid off in 20 years' time. So for the first year you're not, but then obviously that interest is still added on. But you're servicing that interest for the first 12 months.

Dr James, 2m 39s:

I see so okay, that makes sense, and then after that the principal would kick in for the rest. I didn't repay the principal, okay, normal mortgage, repayment mortgage, for example.

Chetan, 2m 47s:

So the capital was then getting repaid and even with the capital you find, you probably start paying more capital back as the years go on.

Dr James, 3m 5s:

Initially it's more interest in terms of the actual loan payment itself, but you'll get a full breakdown as and when the paperwork was to kind of arise, or whichever broker or bank you go down the route of excellent. Now let's talk about how that looks for would be practice owners, because you were telling me a really interesting story about somebody who started a squat up recently and they had leveraged an interest-only mortgage, interest-only loan definitely so.

Chetan, 3m 18s:

Uh, for this gentleman, um squat practice, um very experienced, so late 40s. So he kind of left it late. But what he's uh explained to me is the time was never right. But this is what I say to everyone the time's never right or wrong. Don't worry about base rate, what you're paying, etc and so forth. If you want to start a business, if the opportunity is there, go and do it. We'll find a way of financing things. So for him, what we did was we looked at um a-year term, not a 20-year term. First-year interest only. The next 14 years is repayment. But we've also built into the terms no early repayment charges. So when that dental practice and this is the key word when that dental practice starts doing well, he can actually pay back more of that loan without any penalties, which is great. Loan without any penalties, which is great because sometimes you don't want to over forecast, because you don't really know what kind of clients you're going to get coming in, patients are going to get coming in, how much money it's going to be making. So that's one reason we're taking it very conservatively with this one in the approach we take in terms of borrowing money. He's actually got money in the background, but sometimes it's cheaper to borrow money and initially you can generally borrow a little bit more because you don't have that kind of credit footprint with a new limited company. So because of that method it makes more sense to borrow as much as you can, because thereafter it's no longer about projections, it's about your filed accounts. What did you make? Year one, year two, year three? So let's look at that now and then we can work out your borrowing. And whatever the borrowing is for whether it's another practice, another building, whatever it might be they will look at your actual filed accounts, whereas initially with the swap practices that's the advantage, because there is nothing in the background we're just purely going with projections.

Dr James, 4m 59s:

And you were saying to me that that makes an interesting situation where you can have a brand new company get better terms than a company has some accounts under their belt.

Chetan, 5m 9s:

Potentially yeah, because at the end of the day, what you're dealing with is they're working on the client or the person that's applying for the finance. They're working on their standard kind of credit scores and pre-agreed limits that banks have and so forth. So it's always good to understand the relationship between a client and their bank, whether it's a business bank account, personal bank account, what kind of lending they might have personally, just that whole relationship, and then you work from that and then you work out OK, fine, what kind of lending can we get for this client based on this? But then if you were to look at the opposite side of that, and now the business has been practicing for three years, it's got all those accounts. I've been trading for five years, got the accounts, but because the projections were a lot higher. So say, your projection for year one was 500,000 pounds, but in actual fairness you only made £400,000 and your profits went down by 20% as well. So then your borrowing in the future reduces. So sometimes it makes more sense borrowing as much as you can in the beginning, especially if you don't have to pay anything back in terms of the capital element for the first 12 months You're still servicing the interest. But what it does give you is the options of not worrying about your finances as much and gives you time to build that practice. And once you build your uh practice whether it's your patient bank etc. And so forth that's what's going to keep that money coming through well, we've got to remember as well.

Dr James, 6m 30s:

In the very first year of lots of businesses, a lot of us just don't know what the hell we're doing. You're going to be playing fiddle to everything, so you're going to be your accountant. A lot of us just don't know what the hell we're doing.

Chetan, 6m 40s:

You're going to be playing fiddle to everything, so you're going to be your accountant, you're going to be a bookkeeper, you might be a secretary because you're working out of hours. So there's so many things that you're trying to wear hats for, whereas the last thing you want to worry about is finance. So if that financial burden is reduced, it's going to give you that much more focus to focus on the practice itself well, and and yes, and it just gives you a little bit of wiggle room to figure this stuff out.

Dr James, 7m 4s:

You know you're literally paying. Some people call it the cost of ignorance. It's like a debt, right? What's? What's the biggest thing that's holding us back from making a million pound in dental practice, in fact, that we don't know how right, so you kind of pay it down, don't you? And, um, it's, it's good to think. You can almost think of it as like an amortization really is a cool way that someone explained it to me once. And uh, yeah, it's obviously, if you've got an amortization on the balance sheet, well, you definitely don't want to have more finance. You don't want to. You don't want to have uh, you know, interest on top of that, or you want to minimize it as much as possible.

Chetan, 7m 36s:

I thought that was a cool way of thinking about it one thing I've learned we've worked with a lot of dentists now is dentists are one of the professions that I find they want to pay their debt down as quickly as possible. So because obviously we work with a lot of businesses and business owners, but the the dental field they like to pay their debt down, which is great, because, yeah, you borrowed the money for a, but then you've paid it off as quickly as possible, so you're not paying that total amount of interest, so you're saving that interest element because you're making that payment a lot sooner.

Dr James, 8m 5s:

Yeah, yeah, yeah, yeah, yeah. And there's a time and a place for that right. And sometimes it can be an idea just to hold back and repay everything, particularly if you can get more bang for your buck in other areas. And I used to definitely be in that camp where I was like, right, let me just pay off my debts as soon as possible. I definitely used to think like that. But then I was like, no, if I can have other investments concurrently running alongside that, I actually might make more money and then pay the debt off easier later. Obviously, one has to do the math on that, but it's it's not universal advice or information, it's not universal. How can I say, uh, you know something to act upon for everybody. But, like I say, it's just, it's just important to remember there's like two, two sides of the coin. There's kind of two arguments going on there, but anyway, okay, cool. So let's talk about that interest-only loan you talked about a second ago. What was the rate on it that they agreed?

Chetan, 8m 52s:

The rate we got was 8.75, so it's base at 5% plus 3.75%, so a total of 8.75, which is actually not a bad rate for commercial finance. The loan itself was about £210,000 over 180 months or 15 years. It is unsecured, but the thing is it depends on client situations whether you can get secured borrowing or unsecured borrowing. The main thing between the two is the secured borrowing is normally secured against an asset. Unsecured is normally via personal guarantees. So there are differences between the two but obviously, dependent on the client situation and background, we'd work it out what's best for them and what's available, because lenders will look at you, especially when it's a squat practice. What is there in the background? What other securities are there? Experience, getting a CV of really understanding the dentist, and then knowledge of the local area. Then knowledge of the local area, because when we look at business plans for these, they're very, very complex because it's about understanding how do we get this cheap funding for the clients with no business experience, if that makes sense. Yeah, they've got the dental experience, but they've never been a business owner. So, as well as being an associate for the last 10 years, for example, or five years or four years, have you run a business and that's what the lenders try and understand and that's where we bridge the gap between kind of lender and, say, dentist looking for finance. But this deal, I think it's great and this is going to really help the client because when we actually look at what he's going to be doing there in terms of the area, there's not many dental practices in the area. But then within that you've got to start thinking about cqc, you've got to think about um, the actual cost and the setup of the practice. So sometimes I know I I gave a small figure there, but that's because the client doesn't actually need funding for everything. He's got savings in the background and so forth. So he's trying to keep his funding to a minimum where possible. And initially something to think of is sometimes with squat practices, most of the practice principles are still doing associate work somewhere else. So I don't know if you come across this or not, but you've got to carry on doing associate work because you've not got a pipeline of new business. So you've got to be looking after your practice as well as doing your associate work. So it's managing your time, which is the new business. So you've got to be looking after your practice as well as doing your associate work. So it's managing your time, which is the most important thing. So you've got to basically build a business plan to incorporate all of this, to get those best rates with the finance after and having the option of interest only for 12 months and then going on to capital repayment and so forth.

Dr James, 11m 24s:

There we are, and how much did they put down by way of deposit in that situation and on the squat?

Chetan, 11m 30s:

No deposit. How much capital did they have? 100% funding, that was 100% funding, but obviously there's certain, as I mentioned, guarantees in place and so forth. It's not secured against anything, but at the same time, there were certain guarantees that the clients had to put down.

Dr James, 11m 46s:

I see. So it's not because I believe that's the distinction between a mortgage, a finance as in a mortgage for a dental practice dental practice mortgage versus practice finance right by short term.

Chetan, 11m 57s:

There's also short term finance for tax bills, for dentists is one of the professions that allow you to do it. And then you've got longer term finance for things such as buying a freehold property. So there's so many different things to consider. And you've even got finance for dental goodwill. So when you're buying a practice, your freehold might be bought under one finance agreement and there might be another finance agreement for the goodwill itself. So there's so many different avenues, because I think one thing that lenders like is the dental field in general. It's a high. I think it's worth like 7 billion. I don't know what it's worth, but I think there's a figure I came across recently it's about 7 billion pounds. So why wouldn't the lenders really think about that carefully? Because every lender wants a piece of that after. So how do we use their funding, their knowledge, to help dental practices grow? Because sometimes it is very expensive to buy a practice because of goodwill, and if you're in certain areas where there isn't one and they require a dentist, why not think about this squat dental practice and start, because the costs are lower, because you're not paying any good will?

Dr James, 13m 14s:

well, you're building your own, aren't you right? And then, and then that's another, that's another asset for you, effectively it's kind of more upside and, if you can, if you're willing to start the business and everything, and it goes well and it's my affirmation that if you really throw yourself at it, you'll make it work. Man, man, in my opinion, most of the time, obviously, there's extraneous factors, but you know just.

Chetan, 13m 34s:

That's what the business plan comes in. So when you are doing a squat practice, think about your business plan, think about your demographics, think about your client back there. How much of it is going to be kind of the work that you're doing so effectively and, strangely enough, look, my phone's going off right now and it's actually the actual dental, the dentist I've just done the finance for um. Worst thing never have your phone in front of you um so effectively. Look. The best thing to do is you look at the various options, look at the area, and one thing I've learned is area is key with a lot of these things, because if there's too many dental practices, even the lenders are a bit risk averse. How will it work? Is there a demand in that local area? Because if there's too many dental practices, even the lenders are a bit risk averse. How will it work? Is there a demand in that local area? Because if there's not much of a demand, then that's high risk, whereas you want to keep it to low to medium risk from a lending perspective. So if there's fewer dentists, it just makes more sense, Certainly does supply and demand. One more question, and you might have mentioned this this squat that this I believe you said it was a gentleman, was it? Yep, yep, this gentleman? Yeah, chap, isn't it? NHS, private mixed um. Most of it initially is going to be private, but that's the initial. So then he's going to start looking at the NHS side of things, but most of it's going to be private initially, and that's what we've based our figures on in the projections.