Finance Essentials: Capital options for growing medical practices

Providing excellent service and the best standard of care to your patients requires having up-to-date technology and medical equipment for your practice. However, with rising costs and reduced reimbursements, cash flow isn’t always where it needs to be to finance capital expenditures.

Saving up to pay for these assets in cash is one option, but that can mean delaying other critical investments in your business, limiting your practice’s growth potential. Unplanned expenses, such as a key piece of equipment breaking down unexpectedly or a sharp increase in insurance premiums, can also impact your cash flow and be difficult to finance with cash.

Another aspect that complicates decisions regarding capital expenditures is the reality that getting loans is much harder than it used to be. “There is generally less capital available to small businesses today,” says Christopher Johnson, SVP & President, Pitney Bowes Financial Services, noting that loans to large corporations have consistently risen for the last eight years while loans to small businesses have been declining over that same period.

In fact, one-quarter of small business owners say they can’t obtain the necessary funds to operate their business, according to National Small Business Association(NSBA) study. And, for those that do get financing, only 15% of that financing is coming from large banks.

A Thriving Practice Requires Multiple Financing Options

Regardless of how the financial system got where it is today, not having access to capital when you need it can have a negative impact on your thriving medical practice. The NSBA noted that for small businesses that are unable to obtain financing, 31% say it’s impacted their ability to grow their business or expand their operations.

One way to avoid cash-flow issues is to expand your medical practice’s financing network. “We believe it’s just good financial hygiene for any business, but particularly for small businesses, to maintain a network of capital partners,” says Johnson. “Expanding your financing network helps you avoid over-accessing your primary credit facility, ensures you have accessible credit for unexpected expenses, and allows you to secure capital even when your bank has no more capacity to lend to you.”

There are, thankfully, other sources of SMB financing emerging to fill the gap left by conventional banks. In particular, some established sources of asset-related financing are expanding their offerings for the healthcare sector.

This financing option is becoming increasingly useful as a way to provide valuable cash flow. In 2018, total credit commitments for asset-based lending rose by 3.7% and total asset-based loans outstanding increased by 9.3% from 2017, according to a survey by the Commercial Finance Association.

How to Get the Most from Asset-Based Financing

Asset-based financing typically provides a loan or lease for a set term (i.e. 5 years) and is secured by the asset being financed.  Depending on the type of equipment and value over time, rates for these loans or leases can often be lower than unsecured credit options.

  • Control cash flow by making scheduled payments over time
  • Boost buying power by being able to finance more critical-need equipment, software, and services
  • Optimize opportunity costs by freeing up cash flow for other high-return growth investments
  • Improve profits by upgrading your technology to increase efficiency and generate returns faster

Additionally, because lending is tied to capital expenditures, asset-based financing can be used strategically to lower tax impacts or to achieve a targeted return on investment sooner. For example, in most cases, any new equipment purchased can be taken as a tax write-off (Section 179 deduction). Similarly, expenses and investment decisions can be made in a way to manage which tax bracket you wind up in based on your net business income.

However, because business financing and taxes are complicated, it’s important to consult with a financial or tax advisor as you make financing decisions for your business. It’s also crucial that you find a financing partner that meets your long-term business goals.

“Businesses should certainly ask partners about their preferences for relationships vs. individual transactions, their commitment to financial lending, and how much capital they are willing to invest — not only in the good times but when markets turn,” says Johnson. “You want a partner that is committed through the ups and downs, not one that focuses on individual, quick hit transactions.”

It’s also essential to ask any potential financing partner about their experience and expertise with the healthcare industry. You want your capital partner to not only understand the specific challenges your medical practice faces, but who can customize deal terms for your needs — whether that’s financing new copiers, a 3D imaging machine, or the software and hardware needed to support integrating a new patient record system.

Finally, you want a partner who is truly invested in your success, beyond just the financial capital. “We’ve built our business and value proposition around the things we think are critical to helping small- and medium-sized businesses grow,” says Johnson. “This includes investing the human capital — in the form of best practices and insights — required to help our clients grow.”

There are several financial options available to expand your ability to provide the best patient care. It’s time to give your practice a financial wellness checkup and decide the best options for you.

Learn more about equipment financing and securing the capital you need to grow your practice.