Debt Default Rates On The Rise

The June 26th issue of ABF Journal contained an interesting article in which Turnaround Industry Professionals noted that they expect debt default rates to climb substantially. They predicted that debt default rates will rise above 10% in 2009 as the credit crunch continues to disrupt working capital for many healthcare companies.

In a recent Turnaround Management Association poll, about 70% of the respondents expected a surge of defaults in the next three years, with 2009 being especially large. Further, about 94% of the TMA poll respondents said credit is tighter this year and 80% stated that traditional lenders have become less active and are putting more restrictive covenants and conditions on the loans they do make.

Of course, this tightening on traditional loans is creating a working capital shortage for many healthcare businesses and is causing them to seek alternative sources of working capital. Many have discovered that Medical Accounts Receivable (MAR) Funding can be an excellent source of working capital without restrictive covenants/conditions and without putting incremental debt on the balance sheet.

Three Rx's

For the living organism, the lack of sufficient oxygen prevents growth and absence of it threatens survival. Metaphorically this is important because capital is business oxygen. Insufficient capital prevents growth and development and capital absence dooms business to failure. The metaphor ends there, because oxygen is readily available and accessible to the living organism. Capital, on the other hand, must be acquired.

Obviously, a business requires working capital to fund manufacturing, supplies, overhead and general day to day functioning. "Growth" capital is required to finance development of the business whether the plan is to increase the number of accounts, add additional products or purchase new equipment. Regardless of the reason or need, there are only three prescriptions (Rx) to satisfy your capital requirements: raise equity, acquire debt or sell assets.

Equity financing involves the sale of ownership to outsiders willing to invest in the business. Debt financing is the second Rx. To obtain debt, you are selling your businesses and/or your personal creditworthiness. The lender calculates both business and your creditworthiness which determines whether the loan is made, and the cost (interest rate) of the loan. Rx three is selling assets to raise capital. This is a less traditional, but equally effective method of raising capital. Some conclude, incorrectly, that this method requires selling hard assets such as equipment or furniture. Fortunately, that is not required. The only asset that a company can sell and still remain in business is accounts receivable.

Medical Accounts Receivable (MAR) funding uses the laziest asset owned by a medical practitioner. Becoming aware of such utility can bolster a medical practice or medical services business to new growth and profitability.

"This Is Gonna Cost You"

A timely title in the March 3 issue of the HealthLeaders Financial E-newsletter. Everywhere you read about the business of healthcare, the lament is the same. The liquidity crunch hitting the financial markets is driving up interest costs on debt for hospitals across the country. especially those using auction-rate debt. Furthermore, as one CFO is quoted in the article, "...it is taking over all the time of the accountants, investment bankers and CFO's."

Perhaps moreso now than at any other time previously, today's healthcare financial executives need to find additional resources to meet their financial needs - without going into more debt. A solution: accelerate your cash flow and generate more working capital from your operations. However, reimbursement delays compound the problem so that your cash flow is often an obstacle to profitability rather than a source of working capital.

There is a funding tool that does provide a cash flow solution to your working capital needs. Add Sun Capital HealthCare Inc.'s Medical Accounts Receivable [MAR]Funding program to your fiscal strategies and your cash flow becomes a solution rather than a problem. By selling your receivables, you can have cash within 24-48 hours of submission. Instead of sitting on your balance sheet and not yielding any return, Sun Capital's MAR funding program, specifically designed for and exclusively offered to healthcare executives, can help overcome both the liquidity crunch and the reimbursement delays.

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 (MAR) Funding As a Working Line Of Credit

MAR Funding can be used as a "reserve working capital line," for medical providers. The flexibility inherent in this kind of finance allows providers to use their third party insurance claims (already billed and awaiting payment) to fund daily needs as they occur. Funds for such use can literally be placed in the provider's account and can be available for use within 48 hours of such deposits.

Many medical providers experience "highs" and "lows" in cash flow as a result of insurance and governmental payors protracting payments for a litany of reasons. Paying for supplies, payroll and other daily operational expenses found in medical practices can be easily accomplished by opening an account with a MAR Funding company, specifically Sun Capital HealthCare, Inc. Not all financial institutions offer the ability to use their MAR Funding as a working line of credit. Providers must consider the flexibility offered by the funding source chosen. The ability to pick and choose when and what to finance can reduce costs of funding and allows the provider to "customize" their funding solutions.

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.

Medical Accounts Receivable Funding VS. Banking

When considering the funding options available to help gain working capital, the two most reputable solutions that come to mind are medical accounts receivable funding and banks. The banks can either provide you with the money only one time, the day you receive the loan or the bank can provide you with a line of credit that you use only when you need the money but the bank is charging you for that privilege...if you need to increase your line of credit, you will need to go through the qualifying process all over again. Medical accounts receivable funding doesn't create debt, mortgages, liens or personal and corporate risks...you are actually receiving your money at a discount.

Below is a comparison chart which displays the differences between medical accounts receivable funding and banking:

Visit http://suncapitalhealth.com/benefits.asp to learn more about the benefits of medical accounts receivable funding.