A medical or dental practice is an unusual credit. Margins are strong, demand is durable through a downturn, and the owner is a licensed professional whose earning power is hard to replace in another line of work. It also has close to no collateral. Strip out the leasehold improvements that cannot be unbolted from a building you do not own, and the equipment that loses most of its value the moment it leaves the operatory, and what actually secures the loan is a stream of patient collections that can walk out the door with the doctor. Underwriting a practice is the work of getting comfortable with that.
So the desk asks a different set of questions than it would of a distributor or a contractor. Not what the assets fetch in liquidation, the answer there is discouraging and everyone knows it. Instead: how much does this practice actually collect, how much of that survives once the doctor is paid a market wage for the clinical work, and do the collections keep arriving if something changes about who owns the place. This guide walks through how each of those numbers gets built, in roughly the order an analyst builds them.
Production, adjustments and collections are three different numbers
The most common miscommunication in a first conversation is a doctor quoting production when the lender wants collections. Production is what the practice charged at full fee. Adjustments are the contractual write-downs that insurance carriers impose because the practice agreed to a fee schedule. Collections are the money that reached the bank account. Only the third number pays debt service.
The gap between them is not a rounding error. In an in-network practice it can be a third of gross production or more, depending on the mix of contracts. An underwriter will ask for a production and collections report straight out of the practice management system, by month and by provider, and will tie it back to the tax return. When those two do not reconcile, the file slows down while somebody figures out why.
The metric stack an analyst assembles
Before anyone reads the narrative about a growing neighborhood or a new hygienist, four figures come out of the file. Everything else adjusts them at the margin.
| Metric | The question it answers | Built from |
|---|---|---|
| Collections, trailing 12 months | How much cash does the practice actually take in? | Practice management reports tied to the tax return and deposits |
| Adjusted EBITDA after provider comp | What is left after paying market wages for the clinical work? | P&L, add-backs, and a replacement compensation deduction |
| Debt service coverage | Does that residual cover every payment including the new one? | Adjusted EBITDA divided by total annual debt service |
| Overhead ratio | Is the practice run efficiently enough to absorb a soft quarter? | Total operating expense divided by collections |
Note that patient count is not on the list. It matters as context: a practice with 2,400 active patients and one with 700 behave differently under stress, but it is a supporting exhibit, not a driver.
Normalizing the doctor's compensation
This is the step that surprises first-time borrowers most, and it is the step that separates practice underwriting from ordinary small business underwriting. The owner of a practice wears two hats, and the credit analysis has to pay one of them and can only lend against the other.
The owner as clinician
Every hour the owner spends in a chair or an exam room is clinical labor. If the owner disappeared, someone would have to be hired to do that work, and that person would be paid at prevailing associate rates, often expressed as a percentage of the collections that provider generates. That cost does not go away, so an underwriter deducts it whether or not it appears on the P&L.
The owner as owner
What remains after clinical labor, staff, rent, supplies, lab and the rest is the return on owning the business. That residual is what services debt. It is also what a buyer is really purchasing in an acquisition, which is why the same normalization runs through every practice transaction file.
The practical consequence: a solo owner producing most of the practice's collections personally will show a smaller lendable residual than an owner of the same size practice who has two associates and works two days a week. The second practice is more valuable as a business even though the first may put more money in its owner's pocket.
Overhead, and the ratio that decides margin
Overhead ratio is total operating expense divided by collections, and it is the fastest read on whether a practice is managed or merely busy. Two practices collecting the same amount with a fifteen-point overhead difference are not close to the same credit: that spread is the entire debt service capacity of the weaker one.
| Category | Illustrative share of collections | What moves it |
|---|---|---|
| Staff wages and payroll taxes | 25% – 30% | Staffing ratios, overtime, turnover and retraining |
| Clinical supplies and lab | 12% – 18% | Case mix, in-house milling, purchasing discipline |
| Occupancy | 5% – 9% | Rent per square foot and operatory count versus utilization |
| Marketing | 2% – 6% | New-patient acquisition strategy and referral strength |
| Administrative and other | 6% – 10% | Software, insurance, professional fees, collections effort |
These ranges are illustrative and vary widely by specialty, geography, payer mix and how the practice books its costs. A surgical specialty, an orthodontic practice and a primary care office will each sit in a different place. What travels across all of them is the analysis: identify which category is out of line with peers, and ask why.
Provider concentration and the key-person problem
Concentration risk in a practice is usually about people, not customers. If one provider generates 80 percent of collections, the loan is effectively underwritten on that person's health, license and willingness to keep showing up. That is not automatically disqualifying (most solo practices look exactly like this) but it changes what the desk asks for.
Expect questions about hygiene production as a share of the total, because a strong hygiene program is the part of a practice least dependent on the owner. Expect questions about the associate arrangement, if there is one, and whether it is documented. And expect a life and disability requirement in most structures, sized to the loan, which is standard rather than a comment on your file.
Coverage: the number that sizes the loan
Debt service coverage is adjusted EBITDA divided by total annual principal and interest, including the loan being requested and every obligation already on the books. It decides not only whether a file clears but how large it clears at. Practices frequently look strong here, which is one reason lenders like the sector.
Two things fall out of that arithmetic. First, the replacement compensation deduction is often the largest single line, so how the desk sets it matters more than most borrowers realize: ask what rate is being applied and to which production. Second, existing obligations are in the denominator. Retiring a short-amortization balance before applying can move coverage further than a quarter of production growth.
Collateral is thin, so the guarantee is not
A practice loan is secured by a blanket lien on business assets, which realistically means equipment, the practice management data, the patient records to the extent transferable, and any goodwill. In a liquidation none of that produces much. Lenders know this. It is why professional practice lending leans on personal guarantees, why life insurance assignment is standard, and why personal financial condition stays relevant even for a well-established borrower.
It is also why the lease matters more than borrowers expect. If the loan amortizes over ten years and the lease has four years left with no options, the collateral that generates the cash flow can be evicted before the note is paid. A landlord consent and a lease term that reaches past the loan term are routine conditions rather than obstacles, but they take time to obtain, so start early.
The personal side of a professional file
Personal credit still carries weight. Professional borrowers usually present well here, with one recurring complication: education debt. Large student loan balances are normal in this sector and lenders are used to them. What matters is the monthly obligation, not the balance, and whether an income-driven plan is documented. A $340,000 balance on a documented plan with a $1,100 monthly payment reads very differently from the same balance in forbearance with no plan on file.
Beyond credit, expect a clean-license check, questions about any malpractice history and its resolution, and confirmation of specialty credentials. None of this is unusual. It is slow if you start gathering it after the application goes in.
The document set
What to have assembled before you apply
- Three years of practice tax returns plus a year-to-date P&L and balance sheet.
- Production and collections by month by provider for at least 24 months, exported from the practice management system.
- Accounts receivable aging by bucket, with a note on anything past 120 days.
- Payer mix report showing percentage of collections by payer or payer category.
- Active patient count and new patients per month for the trailing 12 months.
- Equipment schedule with age, and any existing liens or lease obligations.
- Current lease with remaining term, renewal options and landlord contact.
- Full debt schedule with monthly payments, including anything with weekly or daily remittance.
- Personal financial statement, two years of personal returns and a current student loan statement.
- Copy of license, CV, and a short written summary of any malpractice history and its outcome.
Where practice files actually stall
- Practice management reports that do not reconcile to the tax return, with no explanation of the difference.
- Collections quoted as production, discovered halfway through underwriting, which resets the sizing.
- Receivables past 120 days that have never been written off, inflating the apparent asset base.
- A departed associate whose production is still in the trailing twelve months and has no replacement.
- A lease that expires inside the requested loan term, or a landlord who will not sign a consent.
- Credentialing that has lapsed with one or more payers, interrupting a slice of collections.
- Short-term advances with weekly remittance sitting in the denominator of the coverage calculation.
Do lenders look at production or collections?
Collections, essentially always. Production is useful for understanding capacity and for setting a replacement compensation rate, but debt service is paid out of money that arrived. Lead with collections in any lender conversation and have the production report available to explain the gap.
My practice is an S corp and most of my income comes through distributions. Does that hurt me?
No, provided the returns and the K-1 tell a consistent story. The analysis normalizes owner compensation regardless of how it is labeled, so distributions versus W-2 salary is mostly a tax question rather than a credit question. What causes trouble is personal expense run through the practice with no documentation to support adding it back.
How much does my personal credit matter if the practice is strong?
More than in most commercial lending, because collateral coverage is weak and a personal guarantee is standard at this size. Strong practice cash flow can offset a thin credit file to a point, but recent derogatory items, unresolved collections or tax liens will need explanation and sometimes resolution before a file moves.
I have several hundred thousand dollars of student debt. Is that disqualifying?
Generally not on its own. Lenders in this sector see large education balances constantly and underwrite the monthly obligation rather than the balance. Have documentation of your repayment plan and its current monthly amount ready, because an undocumented balance gets treated conservatively.
Does being out of network help or hurt my file?
It cuts both ways. Out-of-network practices show a much smaller adjustment line and often higher margins, which helps. They also carry more patient-responsibility collection risk and can be more sensitive to local competition, which the desk will probe. Neither posture is automatically better; consistency of collections is what the file is graded on.
How long does a practice loan take?
It varies by lender, program and how complete the file is at submission. The two things that reliably lengthen it are documents that arrive one at a time and third parties outside your control: landlord consents, payer verifications and, on acquisitions, seller-side records. Assembling the checklist above before applying is the single largest lever you control.
Will I need a formal valuation?
For an ordinary working-capital or expansion request, usually not. For an acquisition, a lender will typically want either a third-party valuation or its own internal analysis of the price against collections and cash flow. Requirements differ by lender and by transaction size.
Should I apply while my overhead is running high?
It depends on why it is high. A documented one-time cause (a buildout year, a staffing transition, a large equipment purchase) is explainable and often accepted with support. A structurally high overhead ratio with no story behind it will compress the loan size, and six months of visible improvement usually produces a better outcome than an explanation would.
Where to start
Pull twenty-four months of production and collections out of your practice management system and reconcile the collections line to your tax return. That one exercise surfaces most of what an underwriter would find, and it tells you whether your file is a cash flow conversation or a documentation conversation.
Then compute coverage the way the desk would: adjusted EBITDA after a realistic replacement compensation deduction, divided by every payment you owe plus the one you are about to request. If that number is comfortable, the rest is paperwork. If it is thin, work the denominator first: it moves faster than the numerator.
Qualified Commercial Underwriting Desk
Credit and capital markets
The Qualified Commercial underwriting desk reviews commercial real estate, dealer and Main Street files daily. The Academy is written from that work (how files are actually read, priced and declined) rather than from a rate sheet.
Educational content only. Nothing here is a commitment to lend, an offer of credit, or tax, legal or accounting advice. Program terms, timelines and thresholds vary by lender, file and market conditions, and any figures shown are illustrative.