Hospitals Hit Hard By Bond Market

According to a recent article in the Minnesota Star Tribune, two major Minnesota hospitals are facing a serious financial situation. The weekly interest payments on their outstanding debt are soaring, putting them in a credit squeeze. This is attributed to investors moving away from bonds backed by insurers who face substantial exposure resulting from the subprime mortgage market. Consequently, some bonds aren't being bought and other deals are being done only at higher interest rates.

This growing trend puts more pressure on CFO's to refinance their debt and add other financing methods to their fiscal strategies. One such tool is medical accounts receivable funding. It utilizes a non-performing asset, a healthcare provider's accounts receivable, to generate debt-free working capital. Since the costs of this funding program do not fluctuate with interest rates, healthcare executives can plan their financial strategies based on a predictable cash flow.

Medical Accounts Receivable Funding Glossary

Many healthcare businesses have started to become familiar with the advantages of Medical Accounts Receivable (MAR) Funding over the past few years. With a new financial tool comes new vocabulary to become familiar with as well. By understanding the terminology used in the MAR Funding industry, you can gain a better understanding of how this financial tool works and how it can benefit your healthcare company.

Advance Rate: The percentage of the factored invoice advanced to a client upon initial invoice funding. The advance rate is typically expressed as a percentage of the total invoice amount. Advance Rates usually range from 70-80%.

Discount Fee: This is the fee charged by the funding company for performing funding services. Discount fees are typically time-sensitive and are usually a flat, fixed percentage of the total invoice. This fee can be calculated on a daily basis or in 15 or 30-day increments.

Due Diligence: The background check and research conducted by the funder to assess the validity of a prospective client (and that client’s customers) before officially entering into a funding agreement. Due diligence generally involves credit checks, appraisals, UCC searches, lien searches and/or on-site visit with clients.

Medical Account Receivable (MAR) Funding: Medical accounts receivable funding is the sale and purchase of an asset at a discount. There is no debt incurred on the client's balance sheet, and the net result of each transaction will be the conversion of the client's accounts receivable into cash.

Payor: The person, company, or government responsible for making payments on an income stream.

Reserve: An amount withheld by the funder net of the advance. Can be used as a financial cushion to offset against payment shortages, client and the customer disputes, or bad debt losses due to non-payment. The reserve should be released to the client after the customer has paid the funder the total money due on the invoice.

Reserve Release: The process of the funder releasing final monies due the client once the invoice has been totally satisfied less any applicable fees or charge-backs.

Working Capital: In general, the funds needed by a business to pay current expenses such as payroll, benefits, rent and other operating costs.