Sometimes a long-term loan, such as from a bank or an SBA 7(a) Guaranteed Loan, simply does not make sense for a small medical practice. With term lengths typically shorter 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 delayed bill payments or increasing cash flow without spending restrictions. There are three common short-term funding options for doctors and medical professionals:
P Merchant cash advances P Lines of credit P Invoice factoring
Merchant cash advances
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 earnings until the advance is repaid.
Payment amounts are based on your revenue, which means when revenue is lower, your payments will be reduced — and vice versa. As opposed to traditional interest rates, MCAs use what is known as a factor rate based on the financial history of your business. The stronger your history, the lower your rate should be.
It is often easier to get an MCA than other forms of funding because approval requirements tend to be less strict than those for traditional medical practice loans. MCAs also typically do not require collateral. However, MCA regulations vary by state and not all providers are reputable, so do research before signing a contract.
MCAs are best for medical practices that:
Need immediate funding or fast access to working capital.
Seek smaller loan amounts and shorter terms.
Would not be approved by traditional lenders; for instance, businesses with low credit scores.
Business lines of 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 do not exceed the credit limit, and if 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 money borrowed against the line of credit.
Business lines of credit are available from traditional and alternative lenders. Traditional lenders typically have stricter approval requirements such as high minimum credit scores, whereas alternative lenders are more flexible and will consider other factors. When you apply for a business line of credit from an alternative lender, your approval will be based on the revenue and cash flow of your medical practice as well as these factors:
Vendor payment history.
Years in business.
Lines of credit are best for medical practices:
With a strong credit history that want a cushion to fill cash flow shortages
That need flexible access to
Also known as accounts receivable financing, invoice factoring allows doctors to sell their outstanding invoices to a lender in exchange for the net amount in cash. Typically, the lender will advance the medical practice 70% to 90% of the invoice’s value, often up to a maximum of $100,000 per common ownership. Once your client pays their bill, the lender will remit the remaining 10% to 30% of the invoice — minus the lending fee.
Invoice factoring offers shorter repayment terms than other short-term financing options, typically aligning with your accounts receivable period — generally 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”) will:
Review and determine your client’s (or client base’s) creditworthiness.
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 collecting payment from your clients. That is why it is important to choose a lender you can trust to treat your clients tactfully during the collection process. The last thing you want to do is compromise your business relationship with your clients.
Invoice factoring is best for medical practices:
With long accounts receivable periods.
That need to fill in the gaps between sending invoices and receiving payment.
With invoices valued over $15,000 with extended credit terms, and that are not more than 90 days past due.
Alfredo Rosing is vice president of marketing at Greenbox Capital. Send your financial questions to firstname.lastname@example.org.