Loans To Provide Medical Cash Flow-Not The Best Solution!

Financial products have specific characteristics that make them appropriate for some situations and inappropriate for others. To date there is no “one size fits all” cash flow solution product. Purchase Order Funding can only be used in order to fund the manufacturing of a product prior to its delivery to the ultimate owner. Asset-Based Loans can only be structured when the borrower has sufficient “hard” assets to use as security (collateral) for the loan. Invoice discounting (factoring), can only be used to fund a client doing business-to-business / business-to-government transactions and generating an invoice for payment on a future date. The medical community poses cash flow challenges that require a flexible, growth oriented financial product designed to meet the ever-changing needs of medical providers.

To find the most complete cash flow solution for medical providers we must first identify the characteristics associated with the healthcare industry. To begin, we know that insurance companies both private and governmental pay their claims long after the patient’s date of service. The reasons for this are many but these are just a few:

Errors on claim form (patient data)

Errors on claim form (provider information)

Errors on claim form (diagnostic codes)

Errors on claim form (procedure codes)

Requests for supplemental reports, x-rays or notes

The “float” on funds

These all point to the first payment characteristic, “slow.” As we see from the list above the probabilities for errors are numerous which leads us to the second characteristic of healthcare insurance payments which is “inconsistent.”

To clarify the distinction between the first two characteristics, look at the following example.

Provider A can get his insurance checks every 68 days which is certainly slow. If he gets the majority of all of his payments every 68 days, then he has slow but consistent cash flow. The nature of the healthcare industry is not represented by this example however. It usually works out that the provider doesn’t know when he/she will be paid, nor does he/she know how much he/she will get once a payment comes in. The reason for this can be found once again in the 6 characteristics listed above. All of these errors or additional required information take different periods of time to correct or provide. Given that these happen randomly, we now can see the reason for the slow, inconsistent payments.

A third characteristic of the healthcare industry is that normal overhead is a regular occurrence.  Rent, utilities, salaries and the like must be paid on a regular basis, a characteristic diametrically opposed to the irregular cash flow providers receive. The aforementioned characteristics of “slow” / “inconsistent” payments combined with regularly occurring expenses puts the healthcare industry in its current state, “critical.”

Enter, the Asset-based Lender. Asset-based lending is the most common form of financing found in the healthcare arena, yet the industry remains on the critical list. One is then presented with the following question. If most medical providers have the use of an asset-based funding line, then why is there still a huge problem in the industry? The only conclusion one can reach is that ABL (asset-based lending) funding lines do not meet the needs of the medical community. How do they work and where are the flaws?

Anytown Community Hospital is a 200-bed facility located in suburban Jonesville, USA. The local bank with which they have a long-standing relationship has offered to help with their cash flow needs by offering them an ABL. The bank requires certain data from the hospital that provides the bank with necessary information. The most important piece is the average monthly accounts receivable balance carried by the medical facility. This “photograph” of the monthly A/R provides the bank with the basis for its loan. The loan is a finite amount and is secured primarily by the provider’s monthly A/R. As previously discussed, overhead is a constant but cash flow is not.

The usual scenario occurs when the medical facility has very quickly used its entire funding line and the lender will not disburse any more funds until some of the invoices start paying. Once again the medical provider is waiting for bills to pay in order to get its needed funds. A finite line of credit is a cash flow dependent form of funding in that the availability of funds is fully dependent on payments received reducing accounts receivable. Unfortunately, the overhead doesn’t wait for revenue, therefore this funding source is inadequate for the medical industry.

The obvious solution would be a funding strategy which would be “service” dependent where the funding occurs once the service is completed. Enter, the Factor. Traditional factoring is the best form of funding for the medical community. Look at its characteristics. Once the service is performed, the client (medical provider) receives its funding. Immediate cash flow for immediate overhead needs coming from a slow cash flow source. Consistent cash flow derived from an inconsistent cash flow source. This is the perfect solution to a complicated problem.

When dealing with your medical providers, use the above example and impress upon the individual that payment-dependent cash flow streams will not solve their problems. Asset-based lines are not competitive products to factoring. They are significantly different. Point out that such lines are very effective when used to provide a single cash infusion focused on an expansion campaign, additional equipment or another one time funding. Cash flow can only be provided by a service dependent source, and to date factoring is the only thing available.

Fred Leder

VP Business Development

Sun Capital HealthCare Inc.

800 880 1709