Question: When is a business loan not a sufficient strategy to meet the working capital needs of a hospital or other healthcare provider? Answer: When the provider needs to improve its cash flow, but cannot afford or chooses not to increase its debt capacity…and/or the time constraints and the needed amount of capital cannot be adequately served by the inherent limitations and delays in the loan application process.

While loans are a viable and traditional part of the working capital strategy of hospitals nationwide, they are not the only funding vehicle available, nor are they necessarily the best suited option for a healthcare provider’s growth, expansion, and, in some cases, healthcare financial survival. The following case study clearly exemplifies how a hospital found its most effective funding solution by trial and error.

The California-based hospital applied for medical accounts receivable funding with Sun Capital HealthCare, Inc. (SCH), while simultaneously applying for an asset-based line of credit. In the initial discussions, hospital management indicated that their need was strictly improved cash flow and that they viewed medical accounts receivable funding as their funding method of choice. It would provide them with a predictable and steady cash flow stream based solely on their hospital accounts receivable and the amount of funding would not be limited by the hospital’s asset pool being evaluated by a bank at "fire-sale" prices. However, after SCH presented a letter of intent that outlined the terms and conditions of the transaction being offered, hospital management instead chose to execute an asset-based loan being offered by a large regional lender, largely due to their inability to move away from the comfort-zone of their traditional financial mind-set.

Less than six months later, hospital management returned to SCH requesting another accounts receivable funding proposal in order to secure the level of capital and flexibility they required. Here are the reasons the hospital gave for making the switch to accounts receivable funding:

After almost six months, hospital management was in the exact same cash flow situation they were in prior to their accepting the asset-based loan.

The asset-based bank line was insufficient for their needs due to the bank’s non-realistic and significantly "undervalued" valuation of the assets owned by the hospital.

The bank was closely monitoring the hospital’s accounts receivable (a significant asset in the pool) and was quick to disqualify that collateral once the aging reached 90 days. Consequently:

The funding line at that point became dependent on the hospital accounts receivable paying in 90 days or less.

The line became "maxed out" and once again meeting daily cash requirements became a challenge.

Hospital management realized that the significantly higher valuation of receivables by SCH as well as a longer eligibility period provided the most appropriate solution to funding their financial requirements.

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