There are six styles of funding often available to healthcare businesses:
- Business overdrafts
- Credit cards
- Asset finance/refinance
- Invoice finance
- Bank loans
- Commercial mortgages
Of these, overdrafts and credit cards are best used for low-level expenses and for bridging small, short-term cash flow gaps. They can be expensive for large purposes and longer-term use.
Bank loans are a good way of covering general expenses, but they may not be available for all healthcare purposes, as healthcare receivables are not always well understood by conventional lenders, and may not offer the flexible terms required by healthcare businesses.
The three remaining funding styles that are essential for specialist healthcare funding, and this article will examine each in turn.
1. Asset Finance
Asset finance is an effective way of spreading the cost of relevant healthcare associated equipment over a contracted payment term. The utilisation of asset finance allows you acquire the equipment on credit from the finance company. The funder retains legal ownership of the asset until the end of the term, when one of two things could happen:
1) In a hire purchase contract, ownership of the asset is assigned to you once all payments have been made. Depending on the agreement, payments may be spread equally throughout the term, or there may be a larger balloon payment at the end of contract, in exchange for lower monthly repayments. This is up for negotiation with the leasing company and depends on the value of the asset and your cash flow goals. Some robotic surgical equipment, or CT scanners, for instance, may cost over £1.5 million. Many healthcare businesses prefer lower regular payments plus a lump sum, rather than being crippled with large monthly repayments.
2) With a leasing arrangement, you never own the asset outright. At the end of term you either return the asset to the leasing company, extend the contract on the same or similar terms, or renew the contract and swap the asset for a newer model. Private car leasing is increasingly popular these days and medical asset leases work in a similar way. For fields where technology is changing rapidly, such as automated pharmacy systems, it is often more cost-effective to lease an asset and exchange it every 3 to 5 years, rather than invest large sums in equipment that quickly becomes obsolete. You may be able to agree a specialist arrangement whereby you can receive up-to 99% of sale proceeds at the end of the lease period.
The great benefit of asset finance is that you are not necessarily required to provide security for the loan, as the asset itself acts as security. This means that healthcare start-ups, small clinics and private practitioners can access the latest equipment in a managed and affordable manner.
2. Invoice Finance
Invoice finance involves selling your sales ledger to a finance company, who release the bulk of the invoice value upfront and dependent upon the agreement will either chase payment from your clients or support your team to collect the payments. When the client pays the whole invoice, the balance is released to you, minus the factoring company’s fees and interest.
This means not having to wait to receive payment from clients, and not necessarily having to undertake credit control yourself. This is extremely useful for community pharmacies who depend on payments from NHS prescriptions through their monthly FP34C claim. It also saves time for private health providers chasing payments from individual clients.
There are different ways invoice finance can work. The factoring company can manage the whole process for you, or you can manage the sales ledger yourself if you prefer your customers not to be contacted by a third party.
Invoice finance isn’t for everyone, but it is usually a cheaper way of managing cash flow than short-term business loans, overdrafts and credit cards. We would always recommend a review to provide comparisons of these methods.
3. Commercial Mortgage
Commercial mortgages are used by healthcare businesses to acquire property, build new premises, extend or re-purpose existing buildings. Whether this involves fitting out a new medical centre, merging GP practices or converting a building for specialist medical use, healthcare property developments often involve a considerable amount of capital. Borrowing terms for healthcare businesses are similar to other sectors, although seeking a mortgage through a specialist healthcare lender may result in better payment terms and a higher likelihood of acceptance. Commercial mortgages are repaid over 10 to 30 years and can involve fixed rate monthly payments, plus a final balloon payment. You will need a cash deposit usually of 10% to 40% of the total property value, or the equivalent in collateral.
Expert Support To Make The Right Funding Decisions
More information about healthcare sector funding, including the benefits of invoice finance, commercial mortgages, asset finance and other loans, can be found in our Guide To Finance & Funding For The Healthcare Sector. It’s free to download, so please click hereclick here to claim your copy. Our team of finance brokers have specialist knowledge of healthcare funding and are happy to help you find the right product and make a successful application. Please call 0345 5050 888 to discuss your requirements.