“I’m sorry, but we are not comfortable making the loan due to poor credit history!”
Unfortunately, this is a comment I hear all too often from lending institutions when attempting to secure a loan for a practice transition.
For the past 30 years, I have been preparing financing packages for dentists wanting to purchase a practice. Never in that period has money been more available at reasonable terms and interest rates than it has been in the past few years. Yet, it is nearly impossible to get a loan for a person who has bad credit.
What constitutes bad credit?
Obviously, bankruptcy or the default on a loan is not a good sign to a lender, but other issues are just as damaging to credit.
“Slow Pay” is the most common term I hear from a lender. Slow pay is just what it says; payments made after the due date of the payment — usually 30 days or more. Often a payment coupon will have a “late after” or “late charge after” on the statement. This is not the due date! If late charges or reminder notices are sent on a regular basis, a report to the credit bureau will most likely show delinquency in payment. This is “Slow Pay.”
“Maxed-Out Credit” is another problem that lenders do not like to see. If a borrower has five credit cards, each with a $5,000 line of credit, and four of them are at the maximum and the fifth has $4,500 charged against it, a lender presumes that the borrower is living off of the credit cards or certainly spending beyond his/her means. Often a simple explanation is enough if the reasons are legitimate. I had a client who actually lived off of credit cards after relocating to Florida while looking for a job. The explanation was enough for the lender, who, when reviewing the pre-move history, noted that there was no abuse of credit prior to the move.
“Loan Shopping” is the process of applying to different institutions for the same loan. Every time a person applies for a loan, the first thing the lending institution does is a credit check. Every time a credit check is done, it shows up on the credit report and will remain for up to two years; therefore each and every additional inquiry sees the previous inquiries. This shouldn’t be harmful to a person’s credit rating, however most lenders use a rating system that scores points against the borrower for each application made.
Establishing and maintaining good credit is not difficult, it just takes a conscious effort and the knowledge of how your credit rating is determined.
In 1998, American Dental Sales placed over $80 million in loans to lending institutions for practice transitions. Most of those loans were relatively easy to secure because the borrower had good credit. Those who did not paid dearly with much higher interest rates, required cosigners, guarantors, or denial of the loan request.
Every big-ticket item you purchase — house, car, practice, appliances, furniture, or if you need to borrow for an emergency, education, or even a vacation — your credit will be checked!
Set your goal today to establish and maintain an impeccable credit rating.
H.M. (Hy) Smith is president of Professional Transitions, Inc., located in Naples, Florida. Professional Transitions, Inc. assists dentists in selling, buying, appraising, or financing practices. He is a member of American Dental Sales, Inc. Mr. Smith can be contacted at (800) 262-4119.