With Working Capital, How Much Is Enough?

When it comes to deciding how much working capital you need to run a medical practice, how do you know when enough is enough? The answer is not easily attainable, says Tom Loker, chief operating officer at Ramsell Holding Corp., a healthcare-management company in Oakland, Calif.

“When you run a business, it gets down to, ‘Here’s what it costs me to [provide this service], here’s what I’m going to charge, here’s the money I’m going to get to pay my overhead, and here’s how much I expect to make and take home as profit,’ ” Loker says. “The problem we’ve got in healthcare in general is no one can tell you any of those numbers.”

Understanding Capital Needs

So, where do you begin?

Jay Pelham, CFP, is the executive vice president of private banking for Miami-based Gibraltar Private Bank & Trust. He says that some of the principles and concepts of capital needs to support a physician’s practice are similar to those of most small businesses. Whether you’re a doctor, attorney or CPA, or even an engineer or architect, you’re running a professional firm where you’re billing out your time, and then collecting on receivables. Capital is needed to support that business.

“I try to think of it in terms of two types of capital: A fixed-asset purchase that needs to be supported -- whether it’s a copy machine or million dollar piece of radiology equipment -- or what we refer to as accounts receivable, or sometimes gap financing,” Pelham says. “When you talk about that type of working capital, you generate a bill, you submit the insurance and, if you’re lucky, 60 or 90 days later you’re going to get paid.” In the meantime, however, there’s payroll, and rent and utilities, etc., so you need working capital to fill the gap between the time that you’ve generated the receivable and the time you collect the money, he says. If a business grows its receivables, it’s going to need more working capital, and if receivables take longer to collect than average then more working capital may be needed as well.

Pelham suggests that sources of capital in the above situations include direct financing of the practice’s assets, where a physician can go to a lender and say, “I’m carrying a million dollars in receivables from various insurance companies and providers, and I need a line of credit.” The credit line is typically tied to a percentage of your receivables, he says. “Or, you could have alternative financing where you might have other assets outside the practice that you could leverage, and sometimes that financing has better rates and terms, Pelham adds. “And then of course there’s the route of having an equity investor or partner in your business.”

How to Obtain Capital

In today’s economy, small businesses -- certainly small physician practices -- are likely having a tougher time getting financing. “If you go to a boutique provider, or a community bank, they sometimes spend a little more time and energy to underwrite a loan, and [physician practices] can still get financing if you’re working with a healthy lender,” Pelham says. He adds, however, “There are fewer boutique providers, fewer small banks today than there were several years ago,” which magnifies the challenge.

Ramsell Holding’s Loker says that part of the challenge facing physician practices is not just the struggling national economy, but the economy of the U.S. healthcare system as well. “I don’t think you’ll find too many physicians who can tell you whether they’re going to make money or not make money on a procedure that they do,” he says. “I don’t think you’ll find any physicians who will tell you whether they’re even going to make any money in their practice.”

What Lenders Look For

Pelham says that along with all the basic considerations involved in granting a loan, such as personal credit history and having a good track record, a new element being analyzed is a physician’s overall cash flow.

“Let’s say I’m a physician and I have a practice, and need a line of credit to support my medical practice -- maybe I want a medical office condo where I keep my practice, so I have to borrow,” Pelham explains. “The lender would look at how much money the practice is generating, and what are the payments on the debt that go to support that office condo, and to support the receivables.” They’ll also want to know whether this doctor own another business, or other properties, and how are they held? Lenders will look at the entire global inflows and outflows of cash, he says.