The medical industry has experienced a period of unprecedented growth. Companies that provide medical services, such as doctor’s offices, diagnostic centers, and durable medical equipment providers have served a higher number of patients in recent years. Unfortunately, the amount of money that private and government insurers pay for insurance claims has actually been decreasing. And, in many cases, insurance claims from HMOs and PPOs are taking longer to pay.
As you can imagine, having more patients, lower per-claim revenues, and longer payment times often leads to cash flow problems. Even though most healthcare companies will encounter this problem at one time or another, few actually plan for it. Most providers take a “wait and see” strategy – simply hoping that the next batch of insurance payments will solve the problem.
It often doesn’t.
Step one – Forecast your cash flow
The best way to handle a cash flow problem is to avoid it in the first place. You can accomplish this with a little bit of planning and some diligence by getting a handle on your current cash flow and forecasting your future cash flows.
Most accounting packages have a cash flow forecast report that provides this type of information. If yours doesn’t, ask your CPA to prepare one for you. Essentially, you need to take into account your revenues, expenses, and growth projections, and then create an estimate of how much cash you will have at any given point in time. It’s important to remember that, due to the timing of revenues and expenses, you can have growing revenues and negative cash flow.
Unless you are skilled at finance, you should review this report with a CPA or similar professional.
Step two – Solve the problem
How you solve this problem depends on a number of factors, including how quickly your business is growing, how severe your cash flow problem is, and the resources available to you. Here are a few common options that can help you get a handle on working capital shortages.
Build a cash reserve
You can only build a cash reserve while things are going well. This is why it’s important to generate your cash flow forecasts sooner rather than later. Based on those estimates, you can develop a plan to allocate some of your profits into a reserve account to be used for cash flow emergencies.
One common complaint about building a cash reserve is that it can slow down growth because you are setting aside funds that could otherwise be invested in the business. This is a common dilemma for young companies who are still growing quickly.
Use your personal funds
If you have personal resources, a simple way to solve a cash flow problem is to re-capitalize your business. You can accomplish this by lending money to the company or by simply injecting equity. If you decide to lend money to the company, be sure to draw proper and legal loan documents and pay yourself a reasonable interest rate. Having an attorney review your documents is a good idea to ensure tax compliance.
Use doctor loans
This option is available only to physicians who own medical practices. Some business financing companies specialize in lending money to physicians. Many offer attractively priced products that can be used to address cash flow problems. However, these loans are not usually available to other healthcare providers such as nursing homes, hospices, DMEs, and diagnostic centers.
If you need less than $50,000, consider an SBA Microloan. As opposed to conventional SBA loans, these loans are available to small businesses and don’t require as much paperwork. These loans can be ideal for healthcare providers that cannot qualify for conventional doctor loans. Here is a list of providers for every state. One of the most well-known providers is Accion. You can find their qualification requirements here.
SBA loan or line of credit
If you need more than $50,000, you may consider a conventional SBA 7(a) loan. However, remember that this type of loan is underwritten by a bank and is subject to their documentation and lending requirements. The SBA also has special options available to veterans.
One increasingly popular solution for cash flow problems is factoring your medical receivables. This solution helps medical providers with cash flow problems due to slow-paying insurance claims. Factoring provides interim financing, using your receivables as collateral, which enables you to pay for business expenses. You can find more information here.