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BlueSky Wealth Advisors’ CEO, David Blain, CFA, is on the board of CarolinaEast Health Systems, a $1B multi-location medical system in eastern NC.

Small businesses are a challenge for anyone – especially service providers who are very skilled in their line of business but have no formal training managing a business. Physician practices are a great example – doctors spend years in medical school to learn all there is to know about the human body and how to care for it. But running a practice, with all there is to manage from insurance, payroll, and finances can be extremely daunting.

The following Q&A is for physicians who need advice on how to keep their practices solvent and navigating financial shortfalls.

It’s often said that practices should have a solid line of credit in case of sudden financial disasters. What does that mean in practice?

A small medical practice is especially vulnerable to nonpayment from commercial insurers as well as from private-pay patients and government-subsidized health care providers such as Medicare and Medicaid.

Cash on hand and a line of credit established with the practice’s bank or other financial institution should be sufficient to carry the business through a slowdown in collections or uptick in expenses.

I recommend 30 days of expenses on hand in cash and then an additional 2-5 months readily available as a line of credit. This six-month buffer is conservative, but the last thing you want to do is lay off staff as this will only exacerbate the downward cycle.

Calculating the exact amount of cash to keep on hand or have available as a line of credit can be as simple as the estimated amount needed for X days, or it can be a very detailed, delving into things like the cash conversion cycle of your business, profit margins, cash usage rates, and working capital. The revenue level of your business will dictate how detailed you need to be.

Are there potential issues with secured or unsecured credit lines that practices should watch for?

Yes – watch for fees and high variable rates tied to keeping open or using a line of credit. But be especially careful if you secure credit with your home or a personal guarantee. You are risking everything and need to make sure that is what you want to do. In fact, pay a higher rate on an unsecured line of credit may be better than risking your home as collateral. 

Should practices regularly reassess their credit lender(s) and renegotiate terms?

Yes – it’s often worthwhile to shop your line of credit – they are very negotiable and should be re-evaluated periodically.

That said, understand most traditional banks will require you to use their other services or keep an operating account, and switching too often or for a marginal rate improvement can really be disruptive to the operational side of your business.

What other steps should the practice take in preparation for, or response to, a financial catastrophe?

Several safeguards:

  • Keep your debt level low
  • Watch fixed overhead costs – like rent – that do not go down with revenue
  • Keep out of long-term financially significant entanglements
  • Establish a diversified stream of revenue – cash is very helpful in a financial catastrophe
  • Watch your payor mix and don’t let 50% of your business be reliant on one payor
  • Consider offering discounts for cash or early payments from those who pay for health care out of their pockets

You advise physicians to watch for fees and variable rates on lines of credit – what should they look for?

Yes – fees and rates are definitely negotiable. Usually the variable rate is a certain percentage above the prime rate as published in the Wall Street journal:

For example, if prime is 5.5%, the bank may offer prime plus 2%, so your rate would be 7.5%. Some excellent borrowers can get prime minus a certain percent. If they offer prime plus 2% ask for prime plus 1%. Also, the bank may charge a “funding fee” or some other similar term – usually a percentage of the line of credit amount, say .5%. This is also negotiable. And then they may charge an annual fee ,typically a flat dollar amount, to keep the line open. Once again ask if this can be lowered or better yet waived.

Are there specific circumstances under which it would be especially wise for the practice to call to renegotiate terms? Or can the practice try it anytime?

A: While this can be done at any time, three specific times come to mind:

  • First, after you had a strong year and can show you are very credit worthy, they may be willing to give you better terms. Remember the bank wants to loan money to people who can pay it back.
  • Second, if a competitor has a better offer tell your current institution, you were thinking of changing and ask them to meet the competitor’s terms.
  • Third, if you get in trouble financially start negotiating early. The bank does not want a default and may be willing to change the terms. Be careful as depending on the terms of the line of credit they may demand immediate payment of the whole amount if you fall behind. Best to have an informal conversation if you have a relationship with someone at the bank rather than calling a 1-800 number and tell them you are having trouble paying.

What about overhead insurance to help cushion a financial blow? Do these have a big place, small place or any place in a self-protection program? A big place or a small place?

Yes – overhead insurance can have a place, but it’s only to cover practice expenses if the physician becomes disabled or sick and can’t work. With slow or non-payment from insurance companies, it’s not going to help with this.

So in the context of an overall risk management plan overhead insurance plus a personal disability policy can be very important components but not for the situation we were discussing.

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