Financing growth for your healthcare business: How to improve cash flow

When cash flow is restricted, the choice between paying the bills and building a business becomes stark. Growth for individual healthcare businesses can be stymied even in the midst of growth for the entire health industry. And the opportunity is there. Healthcare is the largest — and fastest growing — industry in the United States. Nearly 20% of the economy is devoted to healthcare (1) and one in eight Americans work in the industry (2). By 2024, healthcare will be the largest employer in the country and will create 80% of all new jobs (2). Despite the size and strength of the industry, individual healthcare businesses often struggle to finance the investments needed to accommodate this growth while also staying current with staff and suppliers. Expenditures on electronic health records and other requirements of the Affordable Care Act have constrained their ability to invest in business needs and, sometimes, to meet payroll.

Slowing reimbursements and difficulty borrowing

The pressure to run a successful healthcare business has never been greater, making access to working capital – the life blood of companies – more important than ever. Yet reimbursements are slowing and banks are less likely to lend, making access to working capital an unnecessary challenge. Recent legislative and regulatory actions have slowed or even stopped Medicare and Medicaid reimbursements. Illinois and Pennsylvania are extreme examples, where payments to physicians, hospitals and clinics have been delayed months due to budget impasses. This leaves many healthcare companies providing services and paying their bills with little or no revenue coming in. As Accounts Receivable continue to grow and cash becomes scarce, many clinics and practices face the dire possibility of closing their doors or selling their businesses to raise funds. Meanwhile, banks are far more risk averse in the fallout of the financial crisis. Their inflexible underwriting often requires onerous paperwork and personal guarantees that many business owners cannot – or do not want to – provide. Layer on the changes to billing due to ICD-10 and healthcare businesses are facing unprecedented strains on their finances.

Choosing a path to financing

Months-long delays in bill collection from insurers and government entities mean putting off investing in people, buying a competitor, or updating facilities. Loans, factoring, and lines of credit offer access to working capital for healthcare companies looking to grow or free up cash.

Possible financing solutions:

• Self-funding
• Traditional bank loan
• Factoring
• Line of credit

Questions to consider

1. Will you have to give up ownership of any assets? TIP: Retain as much ownership (and therefore value) in your assets as you can
2. What is the impact on cash flow? TIP: A low interest rate on a traditional loan might seem attractive, but a high monthly payment might bring the opposite of what you are hoping to achieve – improved cash flow
3. Will this solution improve cash flow for at least 2 years? TIP: Solving your immediate problem is good, but keeping it solved in the future is better
4. Is the process transparent? TIP: Make sure you know what you’re getting and how it works
5. Is there flexibility in payments? TIP: Your payment structure might need to change over time as your business changes

Self-funding

Most businesses have company reserves they can tap into when necessary. In this case, using that cash may seem like the best and easiest option, as long as reserves are not too depleted to handle large or unexpected expenses. Another area where it can get tricky is using the personal savings of the executive team. One company founder considered loaning their own savings to the business, but the company’s accountant argued against it for tax and credit reporting reasons.

1. Upsides
   1. Easy access (it’s your money after all!)
   2. No approvals needed (except business partners or spouse)
2. Downsides
   1. Depletes your ability to deal with future bumps in the road
   2. Tax consequences might be unfavorable (consult your tax professional)
3. Who should use this
   1. Stable businesses that don’t anticipate many future challenges to cash flow, have untapped savings, and have no better use for the money
4. Who shouldn’t
   1. Growing businesses that need ongoing capital
   2. Business owners who don’t want to risk their personal savings

Loan from traditional bank

Most businesses have established relationships with traditional lenders through their commercial bank accounts. These known entities can be easily contacted to explore financing options. Small business loans can usually be handled with relative ease (minus the ubiquitous paperwork), though large loans might require personal guarantees or even a mortgage on an executive’s home. Similarly, banks have traditionally shied away from lending to new businesses, even if they are offshoots of a successful parent company.

1. Upsides
   1. Existing banking relationships can make finding a lender quick and easy
   2. Competitive interest rates
2. Downsides
   1. Banks are very risk averse, making loan rules stringent and restrictive
   2. Paperwork can be lengthy and onerous
   3. Often require personal guarantees or collateral (assets like your car or home)
   4. The time from application to funding can take months
3. Who should use this
   1. Stable businesses that aren’t experiencing growth
   2. Businesses that have 2-3 months for lending process to play out
   3. Practices that have no cash flow concerns
4. Who shouldn’t
   1. Growing companies with fluctuating income
   2. Established companies looking to invest in their business

Factoring

Factoring is a process where a business sells its assets (usually Accounts Receivable) to another company for a discounted price. That second company then tries to collect against the Accounts Receivable. To be profitable, the price paid to the healthcare business must be low enough to cover the risk of not collecting all of the accounts. It is common for factoring companies to pay less than half the value of the assets.

1. Upsides
   1. Monetize old or low quality receivables
2. Downsides
   1. Lose 50% or more of the value of your asset
   2. Your patients go into collection, straining your relationship with them
   3. Factoring industry has a checkered reputation
3. Who should use this
   1. Businesses with receivables they might otherwise write down
4. Who shouldn’t
   1. Businesses with access to lower cost options
   2. Businesses with receivables from government entities (Medicare, Medicaid) which are subject to anti-assignment laws

Line of credit

Lines of credit are similar to loans, but with the key difference that lines of credit payments only include interest and fees. This makes monthly payments lower, delaying the principal repayment until the end of the borrowing period. A line of credit can be an excellent option for a company that anticipates increasing future revenues, especially if the funds from the line of credit are used to invest in the growth of the business.

1. Upsides
   1. Smaller monthly payments
   2. Better cash flow
   3. Flexibility (draw what you need, take more or use less)
   4. Rates better than factoring
2. Downsides
   1. Rates might not be as competitive as a bank
   2. Might require a “controlled” bank account
3. Who should use this
   1. Growing businesses or businesses looking to finance that growth
   2. Companies with predictable billing, but unpredictable cash flow
   3. Business owners who don’t want to risk their house or use a personal guarantee for their business
4. Who shouldn’t
   1. Businesses with less than 2 years earning history
   2. Business with low quality collateral

Sources: (1) National Health Expenditure Projections 2012-2022 (2) Bureau of Labor Statistics (http://www.bls.gov/news.release/ecopro.nr0.htm)