How does a medical practice refinance merchant cash advances?

Why a profitable practice runs short of cash

A medical practice is paid in arrears by organizations it does not control. The visit happens, the claim is coded and submitted, the payer adjudicates it, and payment arrives some weeks later, reduced to the contracted rate and sometimes denied pending an appeal. Meanwhile staff, rent, malpractice premiums, supplies and the billing system are paid on schedule. In an ordinary month, old claims being paid cover the cost of new visits. When something interrupts that flow, a practice with healthy earnings runs short fast.

• A billing disruption. A change of practice-management or billing system, an outside billing company that falls behind, or a coding change that triggers denials can stall collections for weeks while every cost continues.
• A new provider. A physician or nurse practitioner who joins is paid from the first day but may not be able to bill some payers until credentialing is complete.
• A payer problem. A contract renegotiation, a payment hold during a review, or a recoupment of past payments takes cash the practice had counted on.
• Patient balances. As more of each bill falls to the patient under high-deductible plans, more revenue is collected slowly, or not at all.
• Equipment or a new location. Imaging, lab or procedure equipment, or the build-out of a second office, is paid for before the revenue it produces.

An advance bridges the gap for a month. But it is repaid daily, usually by a fixed ACH debit rather than a share of card receipts, since most of a practice's revenue arrives from insurers, not cards. The debit does not slow when the payer does. When the claims backlog finally clears, much of what is collected has already been promised to the funders, and the next gap begins. The general mechanics of getting out are on refinancing stacked cash advances into term debt; what follows is what is particular to a practice.

Gross charges are not receivables

The most common error in a practice's first conversation with a lender is its receivables figure. Practice-management systems report accounts receivable at gross charges, the practice's own fee schedule, which no payer pays. What the practice will collect is the contracted rate, less denials that are not overturned, less patient balances that go unpaid. A lender values receivables at that expected amount, taken from what the practice has actually collected in the past.

The same logic governs earnings. A lender sizes the refinance on net collections less operating costs, rebuilt without the advance costs, and it reconciles collections to bank deposits month by month. A practice that keeps cash-basis books has an easier reconciliation; one on accrual books will be asked to show how its receivables have turned into cash. See cash vs accrual financials for lenders and EBITDA add-backs.

Government payers and the lockbox

Medicare and Medicaid payments are protected by anti-assignment rules: the program pays the provider, and a practice cannot direct those payments to a creditor. Healthcare lenders work within that. Government payments are deposited into an account in the practice's name, and a standing instruction, which the practice can revoke, sweeps the balance to the lender. Commercial payers' remittances can go into an account the lender controls directly.

An advance funder usually ignores all of this and debits the operating account. A healthcare asset-based lender cannot, so the refinance includes setting up these collection accounts and redirecting remittances, and payers still paying into the old account is a common problem in the first months after closing. It is also why a lender that does not specialize in healthcare often declines to count a practice's receivables and lends on earnings alone. See deposit account control agreements and lines of credit for medical practices.

Nothing in a refinance file needs patient-identifying information. Agings by payer class and collection summaries are enough; keep patient records out of anything sent to a lender.

What a lender weighs beyond the numbers

• Who produces the revenue. Collections by provider. A practice where one physician produces most of the revenue is a key-person credit, and a lender may require life and disability insurance assigned to it. See key-person life insurance.
• Payer mix. The share of collections from Medicare, Medicaid, each commercial plan and patients. Heavy reliance on one commercial payer matters most when its contract is up for renewal.
• Ownership. Many states restrict who may own a medical practice. The borrower's structure has to fit those rules, and a lender will read how the practice and any management company are related before it decides which entity borrows.
• Open audits and recoupments. A payer audit or a recoupment demand has to be disclosed; a recoupment can take cash out of the same receivables the lender is counting.
• Why the advances were taken. A documented billing disruption that has been fixed, with collections back to their earlier level, is a story a lender can underwrite. A practice whose costs have simply outgrown its collections is a different file.

Which products fit

A practice that stacked advances because of a billing disruption is usually best served by a term loan that pays off the funders, with a modest line against receivables for the next disruption. Where receivables are large relative to earnings, the line can do most of the work. Physician practices are frequent SBA borrowers, so SBA is often where the financing ends up once the advance history is behind it; see getting a bank loan after advance history and refinancing existing debt with a 7(a) loan. Practices in dentistry and other health services face variations on the same problem: see dental practices and healthcare providers.

Preparing the practice's file

• P&L and balance sheet for the last full year, a year-to-date P&L through last month-end, and business tax returns for two to three years.
• Monthly gross charges, adjustments and net collections for at least two years, from the practice-management system.
• An accounts receivable aging by payer class (Medicare, Medicaid, each major commercial plan, patient), with days outstanding.
• Collections by provider, and each provider's credentialing status with the main payers.
• Every advance agreement, a current payoff letter for each, a debt schedule showing them beside equipment notes and any line, and bank statements for the months the advances have been debiting.
• Personal tax returns and a personal financial statement for each owner of 20% or more, if an SBA loan is in view.
• A short account of what caused the gap and the evidence it is fixed: the new billing company's first months of collections, the credentialing approvals, the resolved payer dispute.

Transparent turns these into the lender package in a day once they are in: financing model, lender presentation, blind teaser and underwriting memo. The teaser describes the practice by specialty, providers and net collections, never by gross charges, and states the advances as obligations with stated balances retired at close. See the package and how we underwrite.