Navigating Challenges: DSOs in a Rising Interest Rate Environment

Sponsored Content: Holland & Knight

By Eric A. Scalzo and John Arnold, Partners, Holland & Knight

Eric A. Scalzo
John Arnold

Dental support organizations (DSOs) play a significant role in the dental industry, providing critical support services to dental practices and expanding access to quality patient care across the country. However, these organizations face unique challenges in a rising and high interest rate environment. The impact of higher interest rates extends beyond increased borrowing costs, encompassing risks such as defaulting on credit facilities, tighter lending conditions, changing business plans, negotiating forbearance with lenders and the risk of foreclosure. 

Defaulting on Credit Facilities and Negotiating Forbearance

Rising interest rates can significantly increase the cost of servicing debt for DSOs, putting pressure on their cash flow and potentially leading to default on credit facilities. To mitigate this risk, proactive financial management is essential. DSOs should closely monitor their debt levels, consider refinancing options, negotiate favorable terms with lenders and maintain open lines of communication to address any potential challenges. In situations where DSOs are struggling to meet their debt obligations, seeking forbearance can provide temporary relief. It is important, however, to recognize the risks associated with forbearance, as a failure to meet agreed-upon terms can lead to foreclosure. Engaging in transparent and constructive discussions with lenders, presenting a comprehensive financial plan and seeking professional advice are crucial in these negotiations.

Tighter Lending Conditions and the Risk of Foreclosure

As interest rates rise, lenders often become more cautious, which results in tighter lending conditions. DSOs may face difficulties accessing credit or obtaining favorable loan terms, hindering their expansion plans or ability to invest in new technologies and services. Demonstrating financial stability, strong business models and a clear growth strategy is essential to instill confidence in lenders. Exploring alternative funding options, such as private equity partnerships or strategic alliances, can provide avenues for capital infusion. It is important to carefully assess the financial situation, explore available options and engage in transparent discussions with lenders to mitigate the risks of foreclosure.

Changing Business Plans and Adaptation

In a rising interest rate environment, DSOs may need to adapt their business plans to help ensure sustainability and profitability. Higher borrowing costs may require them to optimize operational efficiencies, control expenses and seek new revenue streams. DSOs should evaluate pricing structures, negotiate favorable contracts with vendors, implement cost-effective technologies, and focus on assisting practices with patient retention and acquisition strategies. A proactive approach to monitoring industry trends and adapting business models accordingly is crucial. 

Managing Debt and Interest Rate Risk

DSOs should adopt a prudent approach to managing debt and interest rate risk. This includes diversifying their debt portfolios to mitigate exposure to floating interest rates, exploring fixed-rate financing options, and implementing effective interest rate risk management strategies. Engaging with financial advisors and experienced legal counsel can provide valuable guidance in developing risk mitigation plans tailored to the unique needs of DSOs.

Moving Forward

As interest rates continue to rise, DSOs face several critical challenges. Defaulting on credit facilities, tighter lending conditions, changing business plans, negotiating forbearance with lenders and the risk of foreclosure are among the significant hurdles. However, by adopting proactive financial management, demonstrating stability to lenders, adapting business models and carefully navigating negotiations, DSOs can successfully navigate these challenges. It is essential for DSOs to monitor the changing landscape, seek outside advice and counsel, and leverage innovative strategies to help ensure their long-term success in a rising interest rate environment.