Dental practice working capital: funding NHS timing gaps, associates, labs and tax bills

Dental practice working capital funding is short or medium term finance that smooths timing gaps in a practice's cash, rather than paying for a long-life asset such as a chair, a scanner or a building. It is repaid from the practice's normal income over a period that matches the gap it is filling, which might be a few months for a tax bill or a few years for a permanent increase in the cash a growing practice needs to hold.

The facilities lenders typically offer dental practices fall into a handful of types:

• Term loans, usually unsecured at smaller sizes, repaid monthly over one to five years. See our page on working capital loans for how these work across sectors.
• Revolving credit facilities, a limit the practice draws on and repays as income arrives, so interest is paid only on what is used.
• Tax funding loans, which pay a VAT, corporation tax or self-assessment bill and spread the cost over a set number of months.
• Merchant cash advances, for practices with high card takings from private patients, repaid as a share of future card income.

Invoice finance, common in other sectors, rarely suits a dental practice. Patients usually pay at the point of treatment or through a plan, and NHS income is not invoiced to customers in the way invoice finance needs, so there is no sales ledger to lend against.

Where the cash gaps come from

• NHS contract income. In England, practices holding an NHS contract are generally paid monthly instalments of the annual contract value, with a reconciliation after the year end against the activity actually delivered. If delivery falls short, part of the year's payments can be recovered, which arrives as a cost the practice did not budget for. Arrangements differ in Scotland, Wales and Northern Ireland, and lenders familiar with dentistry understand each system.
• Associate costs. Associates are commonly self-employed and paid a share of the fees they generate. A practice that adds an associate pays them from day one, while the new list and private income take months to build.
• Laboratory bills. Crowns, bridges, dentures, implant components and aligners are often paid for before a private patient has finished paying for the course of treatment, and lab costs rise sharply when a practice grows its private work.
• Plans and patient finance. Monthly plan income is steady but small per patient, and payments from patient finance providers follow their own timetable.
• Seasonality. Summer holidays, December and staff absence all reduce chair time while fixed costs carry on.
• Tax. A strong year produces a larger tax bill nine months to a year later, often at the same moment the practice wants to reinvest.

Tax funding lets a dental practice pay HMRC in full and on time, then repay a lender in monthly instalments, so a single large bill does not drain the reserves the practice needs for wages and lab costs. The tax a practice faces depends on how it is set up:

• Corporation tax for incorporated practices, payable on a fixed date after the year end. Our page on corporation tax loans explains how lenders fund it.
• Self-assessment for principals who trade as sole practitioners or partners, including payments on account.
• VAT. Most dental treatment is exempt from VAT, so many practices are not VAT registered at all. Practices with significant cosmetic or other standard-rated income, such as whitening or some facial aesthetics, may need to register and may be partially exempt, which can make VAT quarters uneven. Our VAT loans page covers how quarterly bills are funded.
• PAYE for employed nurses, hygienists and reception staff, which is due monthly and is treated seriously by lenders if it falls into arrears.

Your accountant should confirm your tax position; we arrange the funding, not the tax advice. If you are weighing a lender against an HMRC payment plan, our comparison of Time to Pay and a tax loan sets out the trade-offs.

Working capital finance suits an established, profitable dental practice whose problem is timing rather than viability. Typical situations include:

• a mixed NHS and private practice facing an unexpected contract reconciliation repayment;
• a practice adding an associate, hygienist or extra surgery session and funding the months before income catches up;
• a practice growing implant, orthodontic or cosmetic work, where lab and material costs are paid up front;
• a practice with a large tax bill after a strong year that wants to keep cash for planned investment;
• a recently acquired practice where the new owner is rebuilding reserves after completion.

It is the wrong tool for some needs. Chairs, scanners and imaging equipment are usually better funded through dental equipment finance, which matches repayments to the life of the asset and leaves working capital free. Buying a practice belongs with dental practice acquisition finance, and a new practice with no trading record is better approached through squat practice finance. Where a practice is losing money every month for structural reasons, more borrowing tends to delay rather than solve the problem, and lenders will usually say so.

A difficult past year is not always a barrier. In one completed case, we arranged a £50,000 business loan for a dental laboratory despite a historic loss, based on improved trading.

Decisions on dental practice working capital can come within a few working days in straightforward cases, once a complete set of documents is with the lender. Smaller unsecured loans and tax funding tend to move faster than larger or secured facilities, which can take several weeks if a lender needs to take a charge or obtain consent from an existing funder. The things that slow cases down are missing management accounts, unexplained dips in income, an unresolved NHS reconciliation and finding out late that an acquisition lender holds security that needs its agreement. If a tax deadline is approaching, start early: lenders cannot turn a late, incomplete application into a fast one.

Most smaller dental working capital facilities are unsecured against property but supported by personal guarantees from the principals, partners or directors. Larger facilities, or those for practices with existing debt, may involve a debenture over the practice's assets or a charge over property. Where an acquisition lender already holds a debenture, a new lender may need that lender's consent, or the two may need to agree how they rank. Read our guide to personal guarantees before signing one, and ask whether a cap on the guaranteed amount is possible. Some lenders offer facilities without a personal guarantee in suitable cases, usually at smaller sizes or for stronger practices.

The cost of working capital finance is made up of interest on what is borrowed plus any fees, and the structure varies by product. Term loans usually carry a fixed monthly repayment covering interest and capital, and may have an arrangement fee added to the loan or deducted from the advance. Revolving facilities charge interest only on the amount drawn, often with a fee for the facility itself or for renewing it. Tax funding loans run for a shorter period, so the total interest is smaller even though the cost per month can look higher. Merchant cash advances repay a fixed total amount through a share of card takings, so the effective cost depends on how quickly takings come in. Check early repayment terms: some facilities let you settle early with a rebate of future interest, others charge a fixed total regardless.

The best alternative is often to stop working capital being spent on things that should be financed separately. Practices commonly consider:

• Equipment finance for chairs, scanners and imaging, which keeps cash in the business.
• Refinancing existing practice debt to lower monthly outgoings or release cash. Our guide to refinancing a dental practice loan explains when this works.
• A secured business loan where the practice or its owners have property, which can support a larger or longer facility.
• A revolving credit facility for practices with regular, predictable peaks. See our revolving credit facility page.
• Agreeing terms with HMRC directly, where the practice cannot pay and borrowing would not be affordable.