Due to the dynamics of the healthcare industry, hospitals can encounter cash flow problems from time to time. Hospitals are under pressure to reduce costs and work with insurance companies that pay slowly. This delay affects their revenues and cash flow.
On the other hand, hospitals face constant pressure to meet their financial obligations. They have numerous expenses – such as payroll, facilities, and equipment – that have to be paid in a timely manner. Given the combination of slow payments and ongoing expenses, their cash flow suffers.
Obviously, cash flow problems won’t be serious if the hospital has sufficient cash reserves or a line of credit. However, a cash flow shortage can become serious if the institution is not well prepared. It can leave the hospital at risk of missing critical vendor payments or, worse, payroll.
Finance medical insurance claims
One simple way to improve your cash flow is to finance your medical insurance claims with a line of credit, medical factoring, or an asset based loan. These three solutions can provide similar results. The hospital gets the funds it needs to pay business expenses and to grow.
Using medical factoring to finance a hospital
Medical factoring is a specialized form of factoring that works specifically with the medical industry. A medical receivables factoring program allows you to finance your medical claims using a factoring company. The factoring company provides you with an advance on your claims, which gives the hospital immediate access to working capital. Transactions are ongoing and settle as insurance companies pay claims (or batches) on their regular payment schedules.
Advantages of a factoring line
Medical factoring is much easier to get than conventional financing. The lines are more flexible and don’t have the strict underwriting requirements or financial covenants of lines of credit. However, this flexibility comes at a cost. Factoring lines usually cost more than conventional loans.
Factoring lines also adapt very well to changing needs. Lines can increase to match increased billings without needing much underwriting. In certain situations, the factoring company may also issue over-advances to help hospitals when cash flow is especially tight.
Using asset based loans to finance a hospital
Another financing alternative for hospitals that have cash flow problems is asset based financing. Asset based financing allows you to finance your marketable assets – accounts receivable, equipment, and inventory. Most asset based loans require a minimum funding of $1,000,000.
Asset based loans vary in structure based on the assets being financed. Lines that are backed by medical claims (accounts receivable) operate much like lines of credit. You can finance the claim, which settles once the insurance company pays it. In this way, an asset based loan is similar to factoring.
Lines that are backed by equipment operate more like term loans. The finance company provides its initial funding, and the hospital makes payments over time to amortize the loan. Hospitals that finance multiple asset types can receive a hybrid-type facility which combines both structures.
Advantages of an asset based loan
Most asset based loans can be easier to manage than a factoring line of similar size. Additionally, they usually have better pricing. However, qualifying for an asset based loan is more difficult than qualifying for a factoring line. The hospital needs to have reasonably good financial statements, be free of major problems, and have a well-established billing and collections function.
Which one is better?
Both solutions have their advantages and disadvantages. The better solution actually depends on the specific financial situation of the hospital. In general, medical factoring is a better solution if the hospital:
- Has cash flow problems
- Has tax problems
- Has fluctuating cash flow requirements and may need an over-advance from time to time
- May not be able to meet payroll
On the other hand, an asset based lending facility is a better option if the hospital:
- Has cash flow problems but has reasonable financials
- Does not have major tax problems
- Has defined turnaround plans
- Wants to acquire assets
How to select the right lender
Providing the right cash flow solution to a hospital is a complex task. Hospitals have specific cash flow needs that are different from the needs of other types of medical facilities. If you decide to use financing, work with a company that is both experienced and comfortable in the hospital industry. For more information, read “How to Select a Medical Factoring Company” and “How to Choose an Asset Based Finance Company“.
Does your hospital need financing?
Are you looking to finance your hospital with medical factoring or an asset based loan? We are a leading finance company and offer both solutions. For more information, fill out this form or call us toll-free at (877) 300 3258.