3 short-term doctor’s office loan options
Sometimes a long-term loan, like one from a bank or an SBA 7(a) secured loan, just doesn’t make sense for a small medical practice. With terms typically less than five years, short-term loans are ideal for meeting the immediate needs of a medical practice, such as upgrading office equipment, restocking inventory, covering paying bills or increasing cash flow without spending restrictions. There are three common short-term funding options for physicians and healthcare professionals:
P Merchant Funds Advances P Lines of Credit P Factoring Billing
Cash Advances to Merchants
A merchant cash advance (MCA) is not actually a loan. Offered by alternative online lenders, an MCA is technically a form of financing known as an asset purchase. In exchange for a cash advance, your lender will automatically deduct a portion of your practice’s future income until the advance is repaid.
Payment amounts are based on your income, which means that when income is lower, your payments will be reduced, and vice versa. Unlike traditional interest rates, MCAs use what is called a factor rate based on your company’s financial history. The stronger your history, the lower your rate should be.
It is often easier to obtain an MCA than other forms of financing, as approval requirements tend to be less stringent than traditional medical practice loans. MCAs also generally do not require collateral. However, MCA regulations vary by state and not all providers are reputable, so do your research before signing a contract.
MCAs are ideal for medical practices that:
Need immediate financing or quick access to working capital.
Look for smaller loan amounts and shorter terms.
Would not be approved by traditional lenders; for example, companies with low credit ratings.
Lines of business credit
A line of credit gives you access to working capital without the obligations of a fixed term loan. Lines of credit give you the flexibility to withdraw as much or as little as you need, provided you don’t exceed the credit limit and your business is performing as well or better than when the line of credit was approved. You can withdraw and repay as many times as needed and only pay interest on the portion of the money borrowed from the line of credit.
Commercial lines of credit are available from traditional and alternative lenders. Traditional lenders generally have stricter approval requirements such as high minimum credit scores, while alternative lenders are more flexible and will consider other factors. When you apply for a line of credit with another lender, your approval will be based on your doctor’s practice revenue and cash flow as well as the following factors:
Vendor payment history.
Years of activity.
Type of industry.
Lines of credit are best for medical practices:
With a strong credit history who wants a cushion to meet cash shortages
Who need flexible access to
Also known as accounts receivable financing, bill factoring allows physicians to sell their unpaid bills to a lender in exchange for the net cash amount. Typically, the lender will advance the medical practice 70% to 90% of the invoice value, often up to a maximum of $100,000 per common property. After your client has paid their bill, the lender will return the remaining 10% to 30% of the bill, minus the loan fee.
Invoice factoring offers shorter repayment terms than other short-term financing options, typically matching the term of your accounts receivable – typically between 60 and 120 days. There is no standard factoring agreement, so be prepared to negotiate the terms.
When you apply, your lender (called a “factor”):
Examine and determine the creditworthiness of your client (or clientele).
Review previous invoices and assess how successful you have been in collecting payment.
Negotiate with you based on the results of their risk assessment.
When you choose invoice factoring, the factor oversees the collection of payments from your customers. That’s why it’s important to choose a lender you can trust to treat your customers tactfully during the collections process. The last thing you want to do is jeopardize your business relationship with your customers.
Invoice factoring is best for medical practices:
With long periods of accounts receivable.
This should bridge the gaps between sending invoices and receiving payment.
With invoices over $15,000 with extended credit terms and not more than 90 days past due.
Alfredo Rosing is Vice President of Marketing at Greenbox Capital. Send your financial questions to [email protected]