Is now the time to act before the next hike?
The era of ultra-cheap money is over. With interest rates on the rise, borrowing money is getting more expensive.
The Federal Reserve raised its target federal funds rate by a quarter percentage point in mid-March, the first increase since December 2018. The Fed has laid out a plan for six more rate hikes in 2022, including back-to-back half-point increases in May and June. In total, the Fed’s plan will push the rate on consumer loans 1.9% higher by the end of the year.
The federal funds rate is the benchmark interest rate at which banks borrow and lend to one another. While it does not represent the rate consumers pay, it does affect the interest rates we receive on everything from home mortgages to business loans.
For dental practice owners, the rising rates have spurred an uptick in loan activity as owners try to lock in current rates before they jump up, says Provide Lending Senior Regional Director of Practice Finance Johnette Green.
“Loans for things like new equipment or office renovations that might have been earmarked for the end of the year or 2023 are being pushed up,” says Johnette. “They’re worried about what they will pay in the future, and they want to take advantage of rates that are still historically very low.”
With the buzz of rising interest rates all over the news and reverberating through financial markets, it’s no wonder practice owners are feeling a bit on edge. Many clients are asking our planners if rushing into a business loan to lock in lower rates is a smart idea.
The answer, according to Johnette, is not a simple yes or no. Every practice is different, as is every practice owner. That’s why there are three steps in the loan consideration process dentists should know before pulling the trigger on a business loan.
STEP ONE: KNOW THE TIMING
Standing idly by as interest rates rise can be nerve-wracking, but it’s important to understand the trajectory and timing of the current environment. As previously noted, consumer loan rates are expected to increase another 1.9% by end of 2022. Business loans, however, will move at slower pace.
“For the types of business loans practice owners typically take, the rates were in the high 2% range on a 10-15 year note,” says Johnette. “Right now, they are in the low to mid 3% range, with a swing of about 1% by this time next year.”
She expects the current range to hold pat for the next 2-3 months — just enough time for owners to look at their situation thoughtfully and consider all the options without feeling rushed into making a rash decision.
“Practice owners have a little bit of a window here,” says Johnette. “They don’t have to run out tomorrow and jump into a loan, but they do need to be proactive about looking at the loan options out there and making an informed decision.”
Being proactive starts with looking at any existing loans the practice is currently carrying. Practice owners should refresh themselves on the terms of each loan, including current balances, interest rates and maturity dates.
“Knowing where you stand now on any loans the practice currently has is key to making the process smoother from the start,” adds Johnette.
STEP TWO: KNOW YOUR OPTIONS
There are many more loan options on the market today than even a few years ago, meaning dentists don’t have to go the conventional route. It’s always worth the time to do some independent research to educate yourself on loans that might be a good fit for your specific need.
Some loan options that have hit the market in recent years include:
- Practice Equity Loan – Like a home equity loan, practice equity loans are based on the equity in your business or real estate, if applicable. These can be optimal for buying new equipment, remodeling the practice or further education to make your services more valuable. Just make sure you get a fixed rate, as variable rate loans are uncommon but do exist.
- Down Payment Loans – If you’re looking to purchase real estate for your business, there’s a way to finance it with no out-of-pocket. As the name suggests, Down Payment Loans cover the cash that would normally be out of pocket on a real estate loan. This makes the real estate loan 100% financing, allowing you to keep more cash in hand to operate your business.
- Reset Loans – More of these have hit the market in the last 2-3 years. Basically, they work like this… you get a 20-year loan, and the loan rate changes every five years. These loans typically carry a lower rate through the first five years. But be advised, if rates are significantly higher after year five, you could get burned. On the flip side, if you go into the loan knowing you will pay it off before year five, this could be an attractive option.
- Long Term, Fully Fixed Loans – Typical term lengths on the type of loans used by dental practices range from 10-15 years. Today, there are many options that stretch out to 20 years. This can give owners the luxury of a lower payment when they need it, with the option of paying extra on months they can.
“In general, we recommend going with a longer-term loan because your monthly payment will be lower,” says Johnette. “You can still pay it off sooner, assuming there are no prepayment penalties, giving dentists a lot of flexibility when managing cash flow.”
Another loan scenario that dentists who own real estate need to be aware of are options that combine the practice and real estate funding into one loan. Those loans sometimes carry a variable rate, so Johnette recommends being extra vigilant about checking the terms for both those who currently have one of these loans or are considering one.
STEP THREE: KNOW WHO TO CALL
Even if you’re too busy running your practice to do the due diligence of checking your current debt schedule and researching loan options, Johnette reminds to never try to go it alone, especially in today’s environment.
“If you’re looking into locking in a loan now rather than waiting, the most important step is to reach out to a financial planner like CWA or a healthcare-specific lender like Provide to make sure you get the right loan for your needs,” she said. “You need someone who will evaluate your entire financial picture, then guide you to not only the right loan, but the right time to lock it in.”
In today’s environment, Johnette stresses that the key is having an expert in your corner who can evaluate your entire financial picture and then guide you to the right loan at the right time.
“Dentists are amazing at their craft, but they’re rarely banking or lending experts,” she said. “That’s where we come in. We’re here to take that burden off their shoulders so they can focus on the fantastic work they do.”
To take a deeper dive into how your current or new loan is impacting your financial plan, CWA is always just a phone call away. Feel free to contact our team to talk to a CWA advisor about any professional or personal finance questions you might have.