When you want to open or expand a dental practice in the United States, you may need a flexible funding option. Revenue-based loan management is a popular option because your payments will vary with your revenue instead of a set amount each month. While Revenue-based loan management is a viable option, not all loan management agreements are transparent. There may be hidden fees, a cap on how much you can pay each month, and inflexibility that may affect your cash flow. Therefore, you should ask the right questions before entering a loan management agreement.
1. What is the Maximum Repayment Amount?
Many lenders will advertise low factor rates; however do not clearly state their total repayment allowance. In revenue-based loan management, lenders will generally establish a cap on what can be paid back based on a multiple of the original amount borrowed from them. For instance, if an individual has borrowed $200,000 and the repayment cap is 1.3 times that amount, they repay a total of $260,000.
You should ask:
- What is the maximum amount I will repay?
- Will my repayment cap be a fixed number, or can it change?
- What conditions are created that would cause my cap to change?
Having the total repayment cap will protect your practice from overpaying and help you select appropriate revenue-based financing options to support the long-term growth of your business.
2. Are Prepayment Penalties Imposed?
Revenue-based loan management is highly praised for the element of freedom it offers. In case the growth of your practice is higher than you had initially anticipated, it is only natural for you to want to clear the debt ahead of schedule. Some providers may secretly put in prepayment penalties or refuse to lower the repayment cap even if you make an early payment. You should inquire:
- May I pay off my loan ahead of schedule without incurring a penalty?
- Will early repayment lower my total loan cost?
- Is there a minimum holding period?
A straightforward revenue-based loan management approach should treat outstanding revenue generation as a reason to give more benefits, rather than as a ground for imposing penalties.
3. How Is the Percentage of Revenue Calculated
The amount you have to repay is normally a percentage of your gross revenue. But how that is determined is not always the same. Ask:
- Is it a percentage of gross revenue or net revenue?
- Does that percentage include insurance reimbursements?
- How often is that percentage reviewed?
The difference may be small, but its impact on your cash flow can be substantial. A qualified broker for revenue-based loans can guide you through the process.
4. What Fees are Charged Upfront or Ongoing
Hidden charges are the main cause of predatory agreements. When using revenue-based loan management, you need to make sure you are clear of all other costs in addition to the repayment cap. Here are some questions to ask:
- Is there an origination fee?
- Are there any underwriting or processing fees?
- Are there servicing or administrative fees?
- Request a written breakdown of every charge.
The best revenue-based loan management companies will list all the fees and will not surprise you with these types of deductions after the loan has been disbursed.
5. How Does the Variation of Revenue Affect Payments
Seasonal fluctuations in revenue are common among dental practices. It only makes sense that your financing structure should be designed to accommodate such a situation. Enquire:
- Whether payments will be automatically reduced if revenue decreases
- Inquire if there is a minimum monthly payment requirement
- How is revenue determined
The main advantage of revenue-based loan management is the ability to make payment changes in accordance with slow months. Verify that the contract truly changes in line with the revenue performance and does not have a compulsory hidden minimum that nullifies the whole idea.
6. What Happens in Case of Default
Even the most established dental practices in the US are subject to unforeseen disruptions like changes in regulations and economic recession. Ask:
- What triggers a default
- Is a personal guarantee necessary?
- Can the lender seize the business assets?
Some revenue-based loan management contracts include onerous default provisions, often akin to merchant cash advances, and not revenue-based loans. It’s important to make sure you understand the language so you don’t put your personal and professional assets at risk.
7. Comparing to Alternative Financing Methods
Prior to finalization of this offer for you as a borrower, it is wise to compare it with the following, and/or others like it.
- Compare the structure with revenue-based loan management versus traditional SBA loans or term loans.
- Is this a good option for me to use for revenue-based financing with regard to being able to afford to pay the lender?
- Do I have the ability to request competing loans?
Conclusion
One of the smartest funding options for US dentists who prefer their repayment to be aligned with their revenue is revenue-based loan management. Nevertheless, if you do not pay attention to the small print, hidden fees and harsh conditions can make things very difficult for you financially. You should consider repayment caps, prepayment terms, fees, and default clauses very carefully in order to make sure that your revenue-based loan management agreement is a tool for your practice growth and not a restriction.
