Receivables Financing: 101

June 24, 2011
Though likely not a physician practice's first choice in a long list of borrowing strategies, receivables financing is a viable option for keeping a
Though likely not a physician practice's first choice in a long list of borrowing strategies, receivables financing is a viable option for keeping a business afloat, according to lawyers Judith Eisen and Christina Van Vort, both lawyers of Great Neck, N.Y.-based Garfunkel, Wild & Travis, who recently discussed the issue during a Healthcare Informatics Webinar.

"Facilities that are feeling the pinch often look to receivables financing," Eisen says.

Receivables financing entails the formation of an agreement between a borrower (physician practice) and lender (bank A) — often including a lockbox facility (bank B) for payment processing — in which a practice is loaned money based on the dollar value of its billed services. The strategy delivers to the practice a line of credit, rather than a traditional lump sum loan payout based on real property as collateral. But because the arrangement calls for a rolling line of credit, and the collection of billed claims depends largely on the provider's aptitude for doing so, lenders of this type of loan tend to act more like business partners than dispassionate banks.

As business partners, lenders often want a say in both the revenue cycle management of the practice and the management of the cash it collects (as some of that cash has been promised to the lender).

"What's a little scary about revenue financing is (lenders) are more intrusive — they become your business partner," Eisen says. "It's also hard to exit."

Specifically, lenders will want to see written collection policies that they can then edit to their liking. "Some find their collection process improves as a result of this arrangement," she notes. It's important to remember that though the lender may advise on the collection process, it's still the provider who is responsible (unless the practice has already outsourced that function). Lenders may go so far as to want electronic access to the provider's bank account to monitor cash flow, or even an onsite presence at the provider's office.

Beyond that, a lender will want to know how a practice is spending its incoming cash, according to Van Vort. She notes that lenders may allow providers to pay for services that are vital to continuing operations, but until the lender is paid that may be the only exception. "They want to be in on that decision," she says.

If a practice decides to go down the receivables financing road, it must first ensure there are no liens on its outgoing claims from an existing lender. According to Eisen, there are certain types of financing that do not allow additional financing without consent.

The lender obtains the right to receive payment patient lists and the books and records used in connection with billing. However, Eisen advises borrowers to be sure that what a lender has access to is not over-inclusive. "Limit them to patient receivables," she says. "Many times you see them include other assets like securities, bank accounts and personal property, so read the definitions very closely."

Figuring out how much a practice can get is more complicated than just getting a dollar amount from accounts payable and having a lender cut a check. A number of steps will reduce the line-of-credit ceiling before a final figure is determined.

"The lender will create a cushion for themselves," Eisen says.

When the lender arrives at an amount for the loan, a practice needs to check the fine print again, looking for penalties that may come about as a result of not using the full loan amount (a non-utilization fee) or early repayment. The point — try and get a line of credit that's not too small, not too large, but just right, Eisen says.

Van Vort notes that it's important to have an exit strategy from a receivables financing arrangement. Some providers try to decrease the amount they are allowed to borrow to "wean off" the loan, she says. "If you are constantly borrowing and repaying, unless the borrower is getting more cash, it's hard to get out."

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