Financing a Medical Practice with Cash Flow Problems

March 15, 2014
150 Views

cash flow problems at medical practiceMedical practices have been under constant financial pressures for the past decade. On one hand, operating costs such renting office space, paying medical equipment suppliers, and covering staff payroll have been increasing.  On the other hand, insurance payments for covered services have decreased.

cash flow problems at medical practiceMedical practices have been under constant financial pressures for the past decade. On one hand, operating costs such renting office space, paying medical equipment suppliers, and covering staff payroll have been increasing.  On the other hand, insurance payments for covered services have decreased. Furthermore, most insurance companies and HMOs are paying insurance claims at a slower rate. These pressures have hurt the finances of many healthcare practices.

The Result: Cash Flow Problems

The combination of these three factors – rising costs, declining revenues, and slower payments – often leads to cash flow problems.  These problems aren’t always noticeable at first and can grow insidiously. If left untreated, they can affect your ability to pay your operating expenses in a timely manner. Before long, the practice can miss key supplier or employee payments and risk going out of business.

Is Your Practice Profitable?

The first step in determining if financing can help you is to determine if the practice is profitable. It’s common to misunderstand the relationship between cash flow and profitability. In fact, cash flow problems can occur in both profitable and unprofitable medical practices. However, financing can help you only if your business if profitable. This point is important. No amount of financing can help you if your healthcare business is not profitable.

Determining profitability should be fairly easy if you keep an updated accounting system. Just look at your Profit and Loss Statements for various time periods. Ideally, look at a month, a quarter, and a year. This analysis will give you a good overview of the profitability of your practice. If you are uncomfortable interpreting financial statements, consider enlisting the help of a CPA.

Increase Cash Reserves or Use Funding

One simple way to solve cash flow problems is to increase the size of your reserve by investing additional money into the business. This method can be easier said than done, especially for new physicians who don’t have additional funds to invest. A second strategy is to complement your current cash reserve with business financing.

Depending on the size of your business and your requirements, three financing solutions can help address this problem: Microloans, lines of credit, or factoring.

Microloans: Microloans of up to $35,000 are made specifically to new and small businesses by institutions affiliated with the US Small Business Administration and are easier to get than conventional loans. Note that the loan amount limits and qualification requirements vary by state.

Microloans can be extremely useful for medical practices that have small cash flow problems. One advantage of these loans is that providers often include financial advice with the financing package. This advice can be useful for doctors who are just starting out or don’t have a lot of business knowledge.

Personal or Business Line of Credit: Depending on the size of your medical office, you may be able to get a conventional line of credit from your bank. Doctors can also get personal loans from specialist institutions that lend specifically to individuals in the profession.

Many of these loans and lines of credit can have reasonable terms. However, it’s best to shop around and work with an attorney/CPA during the closing to ensure you get the best possible terms.

Medical Receivables Factoring:  This solution has been gaining traction in recent years as. Factoring helps improve your cash flow by financing your slow-paying insurance claims. You can find a more detailed explanation here. Although this solution can be more flexible than conventional loans and lines of credit, it can also be more expensive. You need to balance flexibility and cost against the profitability of your business.

One important caution

Diagnosing the financial problems of a medical practice can be difficult. Implementing the wrong solution often makes things worse. If your medical office has cash flow problems, work with your CPA to ensure you understand the issues and choose the right solution for your business.

(cash flow problems / shutterstock)

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