Medical and dental practice funding: bridging the claims lag and paying for equipment

Medical and dental practices are rarely short of patients. They're short of cash because they get paid after the work is done, by insurers who take their time. The right funding covers that lag cheaply and puts long-lived equipment on a long-lived loan.

The cash-flow shape of a practice

A practice pays staff, rent and suppliers on a fixed schedule. Its income arrives in two very different streams:

• Patient payments (copays, deductibles, self-pay and cosmetic work), often by card, on the day.
• Insurance reimbursements, which arrive later by transfer once a claim is processed.

Medicare must pay a clean claim (one that doesn't need investigating) within 30 days of receiving it, or pay interest. Claims that are denied, need more information or go to private insurers on their own terms can take considerably longer. A coding change, a new payer contract or a billing-system migration can stall receivables for weeks.

The other big cash event is equipment. Imaging, chairs, lasers, sterilization and practice-management software are expensive and are replaced on a cycle. Then there are buildouts, new locations and buying into or out of a partnership.

Which funding fits, and which doesn't

A line of credit suits the claims lag because you draw it when reimbursements stall and repay when they land. Equipment financing suits the kit, because the asset secures the loan.

SBA 504 loans finance major fixed assets such as real estate and long-life machinery and equipment, but not working capital or inventory. For a practice buying its own building, that distinction matters.

A merchant cash advance can work for a card-heavy practice (cosmetic dentistry, med spa), but for most practices the insurer income doesn't flow through the card terminal, so the advance is repaid from a fraction of the business at a high price.

On equipment, the IRS lets businesses elect a section 179 deduction instead of depreciation for certain property. Ask your accountant whether it applies before you let it drive a purchase.

What it costs: a worked example

Say the practice borrows $100,000 for new imaging at 18% APR over 24 months, paid monthly.

• The payment is $4,992.41 a month.
• You repay $119,817.84 in total.
• The interest is $19,817.84.

Double it to $200,000 on the same terms and the payment is $9,984.82 a month. For comparison, $100,000 as a cash advance at a 1.35 factor over 6 months, paid daily, is $135,000 back in 126 payments of about $1,071.43: about 126% APR. Use the payment calculator on this page to check any quote.

Sterling's take: an x-ray unit that lasts years should not be repaid in months.

What funders typically ask a practice for

• Recent business bank statements.
• An accounts receivable aging report split by payer, so the funder can see how much is owed and how old it is.
• Professional licenses for the owning clinicians and proof of ownership.
• Tax returns and profit-and-loss statements, more for larger or longer loans.
• For equipment: the vendor quote.
• A list of existing loans and advances.

Our funding partner's programs suit practices trading 12 months or more with about $80K a month in deposits, an owner credit score of 600+ and no more than two loans or advances running.

Red flags specific to practices

1. Funding a billing problem. If receivables are slow because claims are being denied, more money only delays the fix. Check your denial rate and days in AR before you borrow against them.
2. Equipment leases with large end-of-term payments. Some leases look cheap monthly and hide a big buyout. Ask for the total cost and the end-of-term option in writing.
3. Advances sized to total revenue but repaid from card sales. If most income comes from insurers, a holdback on card takings can be a very large share of the card stream. Check the effective percentage, not just the headline.

Before you sign

List what you're funding (gap or asset), match the term to it, and convert every offer to an APR.