As many private practices found, health care is not recession proof. In addition to various factors causing their cash flow to decrease, it can be difficult to find bank loans, so some practices might need to look for alternative sources of funding.
Health care is not recession proof. In the last few years, a large number of Americans have had to cut back on needed and preventative care, which has affected many physicians’ bottom lines. A report by PricewaterhouseCoopers revealed that in 2011 46% of patients delayed going to the doctor’s office at least one time because of cost.
Additionally, doctors blame shrinking insurance reimbursements, changing regulations and rising business and drug costs for their decreasing cash flows. To throw another wrench in the mix, it’s often hard for an independent medical practice to secure financing through a bank loan, which rejects more than 50% of applicants. Physicians need the capital to sustain, grow and invest in upgrades, inventory, new equipment or digital technology.
Instead, they must turn to alternative sources of funding to keep their practices afloat. One alternative finance option for medical practices is financing in the form of an unsecured loan or merchant cash advances (MCAs). This type of financing offers businesses a lump sum payment in exchange for a share of future credit card sales.
An MCA is a quick and flexible option that can provide solid businesses with necessary capital in a matter of days. Also, while banks require approximately five years in business, most MCAs will provide financing to businesses in operation for just one year.
Below are tips to help navigate funding for your practice and information on choosing an MCA:
What to look for in an MCA
An ethical, holistic approach
When banks reject the majority of small businesses, their decision mainly relies on the credit quality of the owner. Banks overlook good businesses because they don't look at the overall health based on sales.
A major benefit of working with an MCA involves a focus on the general health and future prospects, not the practice’s personal FICO score. Also, an ethical MCA should be willing to tell a business what is truly the right amount they can afford.
A quality MCA can fund your medical office in less than seven days. This is important during emergencies such as needing to replace broken equipment.
Flexible, realistic repayment schedule
There are two main components to repayment with an MCA.
1. The rate that the business is being charged for the financing. The average fee for a cash advance is under 25% of the funded amount. It varies and depends largely on how much you need/length of the term.
2. The percentage amount of each credit card transaction that is used to repay the financing. The business pays by having a small percentage from each credit card transaction deducted so payment is tied to the practice’s cash flow. Physicians have to make sure the percentage is one that is affordable and will not put them in a financial hardship.
What to watch out for
Companies that try to advance you more money than you need
A company should create a program that is tailored to your needs. Beware of MCAs that try to charge more than the 25% of the amount advanced.
Charging fees or interest on top of the repayment fee
Choose wisely as some MCAs charge points, success fees or other costs on top of the financing cost.
They are an agent, broker or reseller
Your practice needs to work with a company that is the direct funding source.
When you work with a savvy MCA that allows you to get quick funding and re-pay it in a time structure that best works for your practice, your business is able to address its needs and thrive as a result.
Scott Griest is founder and chief executive officer of American Financial Solutions (AFS), one of the nation’s fastest growing merchant cash advances for small businesses. AFS counts hundreds of medical offices nationwide as clients. For more information, visit www.americanfinancesolutions.com.