PROVIDER OPTIONS FOR ENHANCING CASH FLOW IN AN EXPANDING INDUSTRY
By PAT TRUE
As a local provider of medical services, you work hard to deliver the highest quality care to your patients. Unfortunately, you may also have to devote a great deal of time or your staffs time to track payment for those services.
With third party payers, contractual adjustments and re-billing of claims, you are forced to navigate a maze of forms and procedures before you can gain access to what you need most cash to move forward and grow your operation.
As your business expands, access to cash to support growth becomes even more critical. In any business model, it takes cash to meet operating expenses, make payments on a facility or equipment. Your decision regarding the method of accessing cash will have a direct effect on your cost of capital.
Medical providers have several options when cash is needed for short-term business demands, such as:
• Private investment in the practice • Third party investment • Bank loans and lines of credit • Factoring services to affect the sale of claims to a third party |
As you read this article, reflect on the next several years in your practice. Consider your projected growth rate, will additional staff be needed and is facility expansion needed? How much short and long-term capital will be required to implement your business plans and where will you obtain access to that cash?
Few industry segments are expecting such dramatic growth as the health care sector. According to the US Bureau of the Census, the sector is expected to grow from $1.9 trillion in 2005 to $2.6 trillion by 2010. Growth in the health care industry should translate to more facility expansion, continued increases in research cost and higher levels of working capital assets such as accounts receivable and inventory. This means, providers will need access to capital to fund their growth.
Few industry segments are expecting such dramatic growth as the health care sector. According to the US Bureau of the Census, the sector is expected to grow from $1.9 trillion in 2005 to $2.6 trillion by 2010. Growth in the health care industry should translate to more facility expansion, continued increases in research cost and higher levels of working capital assets such as accounts receivable and inventory. This means, providers will need access to capital to fund their growth.
Here are some strengths and weaknesses for each method of meeting short and long-term capital needs.
1. Private investment in the practice Strength This method of expansion offers you the most control since you arent giving up ownership and it involves the least amount of debt. This is often the least expensive expansion option. Weakness Unless you are using prior savings, this method of expansion generally takes longer than other methods, since you are funding expansion from operating proceeds 2. Third party investment in your practice Strength This can be a very quick way to gain capital. Weakness The primary weakness of this option is that you typically give up some control and/or ownership of your practice, and may be more costly than bank financing options. 3. Bank short term working capital loans Strength This can be a low cost option, generally priced at or near the prime rate of interest. Weaknesses This form of bank financing usually requires a blanket lien on all non-real estate assets of the practice, as well as the personal guarantee of the primary owners. 4. Bank asset based line of credit Strength While more expensive than short term loans, this option may be less expensive than a third party investor and not require you to sell any of your interest in the practice. Weakness You will be required to secure this with your company assets and provide personal guarantees, and is more costly than short-term working capital loans. 5. Bank Accounts receivable purchase programs Strength While still dealing with a commercial bank, some programs allow for the purchase of accounts receivable. These full recourse facilities allow the bank to maximize the advance rate, often up to 95%. Weakness While this option can maximize cash flow, the discounts may result in a higher cost. In order to cost justify the sale of accounts receivable, pricing should be evaluated to ensure your practice can make use of the additional funds. 6. Factoring Services Strength Factoring companies may not require your personal guarantee or collateral. Weakness - This option is typically more expensive than other options. This option also lacks the ability to handle all your debt, deposit and investment needs through one organization a commercial bank. |
It is important for you to have access to short-term capital as you grow and to understand the various methods of obtaining that capital in order to reach your business goals. Look for a solution that will help you meet your growth objectives within your desired time frame. Also, look for a financial partner who understands your business and can help you evaluate your business plan and make recommendations that are right for you.
Pat True has more than 20 years experience in banking and finance and serves as Director of Bank Services for Insight Healthcare Financial, Inc (Insight). Insight is a national company that offers an innovative suite of business services designed to enhance the revenue cycle of healthcare related businesses. Working through regional and community banks across the United States, Insight provides the tools for financing institutions to properly evaluate and track collateral assets in the medical arena. Insight offers both a factoring option and a traditional asset based line tool for banks that wish to fund revolving lines in this industry. For more information about Insight, visit http://www.insighthealthcare.com.