28 Aug Maximize Working Capital Loans for Your Medical Business
Running a medical business involves unique demands that can stretch your finances, especially during slow reimbursements or when scaling up services. You may need some help. Like people come to you for injections or crutches to feel their best, your business can use working capital loans to improve and maintain your financial health.
These loans are a financial cushion to help you cover day-to-day expenses, seize growth opportunities, and navigate administrative delays without compromising your services. Learn about financing options and how to wisely manage your funds to get the most out of a working capital loan for your medical business.
Purpose of Working Capital Loans
Business working capital loans fund short-term operating needs rather than long-term investments or upgrades. These loans are quick and flexible financing options that respond to real-time demands, such as covering payroll or purchasing essential supplies.
Lenders typically offer $50,000 to $5.5 million for terms of three to 36 months, depending on the loan type and your business’s revenue. Interest rates vary widely across the different types of working capital loans. In general, anticipate paying higher interest rates the quicker you secure funding, particularly through unsecured loans.
Repayment terms also vary widely since the flexible nature of these loans is one of their strengths. You may pay monthly amounts, daily percentages of your revenue or card sales, or weekly drafts from your account to your lender.
Working capital lenders use different names as they tailor their funding to your business’s needs, but here are some common examples:
- Term Loans: You secure funds upfront and make monthly payments to the lender.
- SBA Loans: The Small Business Administration (SBA) offers entrepreneurs attractive terms and interest rates on its term loans. They have specific qualifications and record-keeping requirements.
- Accounts Receivable: Lenders fund a percentage of your unpaid invoices upfront. When the client pays the full amount, you pay the lender a fee.
- Lines of Credit: Lenders offer you a line of credit, secured or unsecured, that you can access as needed within a set limit. Repayments are based only on what you use and pay set amounts weekly or monthly.
- Asset-Based Lending: You leverage your assets to secure a business line of credit.
- Merchant Cash Advances: You secure funds upfront and repay the loan through a daily or weekly percentage of your card sales. Merchant Cash Advances (MCA) use a factor rate instead of an interest rate to determine the total repayment amount upfront.
- Revenue-Based Financing: You and your lender determine the lump sum amount and the total repayment amount, usually using a factor of the loan amount. You make payments as a percentage of your revenue.
Strategic Financing Options for Medical Practices
The key is to focus on working capital loans and needs in your medical business that generate or protect revenue. That means determining how you will use the funds and comparing the different types of financing to find the best match. Revenue-based financing, accounts receivable, asset-based lending, and term loans are strategic financing options for medical businesses.
Banks and nontraditional lenders offer term loans for businesses at competitive interest rates to established medical practices with good credit history. This financing option can help you strategically stock medical supplies if you qualify. Say you negotiate a 5% discount for early payment or bulk buying from your supplier. Paying with a term loan with an interest rate of 2% saves you money on regular operating costs.
Revenue-based financing is one of the most flexible options since your loan payment adjusts to your medical business’s often uneven cash flow. Consider this loan option when you are waiting on insurance or patients to pay to cover operating costs like staff salaries or building fees. You secure the needed funds for payroll quickly so your doctors can continue seeing patients, and the lender is repaid whenever you are paid.
Accounts receivable is another strategic option for a medical business waiting on unpaid invoices. Maybe you supply healthcare clinics with their weekly products, but they don’t pay you until months later. Accounts receivable would front you a percentage of the outstanding invoices, up to 95%, so you can continue running your business. When your clients pay, you repay the loaned amount with a small fee and keep the rest.
Consider asset-based lending (ABL) if you have valuable medical equipment, tools, real estate, inventory, or invoices. In the case of a hospital, you could leverage your X-ray, ultrasound, MRI, and CT machines for a business line of credit. You could use those funds to invest in better scheduling software or to upgrade your diagnostic tools. You make set repayments on the amount you used, though you can continually maintain a line of credit to cushion your cash reserves.
Real-Life Dermatology Example
You have recently seen a spike in demand for cosmetic treatments at your dermatology clinic, but you’re booked for weeks. You know you’re losing business. You investigate financing options to lease a second treatment room and hire a part-time specialist since you do not have $1.5 million to cover it from your cash reserves.
You secure revenue-based financing after finding a lender for medical business loans and discussing funding solutions. The terms allow you to pay 3% of your monthly revenue toward your total amount. Since the lender offered a factor of 1.7 on your loan amount (instead of interest), the total loan cost will be $4 million. The loan does not have a term, but you expect to pay off the amount within 36 months based on your current revenue.
With the additional provider and space, you reduce your wait time from four weeks to five days. You notice an increase in patient retention and revenue, easily covering the monthly cost of the loan repayment. With the increased business, you pay off the loan amount in 27 months, and your increased revenue supports the additional specialist and space.
Tips to Maximize Your Working Capital Loan
When using working capital loans in your medical business, use these best practices to maintain a strong financial position:
- Shop for Experts: The right lender is just as valuable as the right loan. Look for lenders specializing in medical business loans. Talk with multiple financiers to find one who will work with you as an honest, insightful partner.
- Make a Plan: Outline how you will use your working capital to generate or protect revenue in your clinic during the loan term. Add repayments to your budget projections.
- Track Your Funds: Tie any increase in revenue, decreased costs, additional expenses, or new weaknesses back to your plan. Measure the return on any investment (ROI) made with borrowed funds to evaluate if you need to pivot.
- Focus on One Loan: Taking on too many loans, even small ones, strains your business. Focus on using your current capital strategically.
A Strategic Tool
In a medical business, you know the value of proactivity. You have those patients who refuse to use a walker or take medicine until they are truly suffering, and sometimes need much more intensive care. Managing your business needs early with working capital loans keeps you from needing financial emergency treatment. When applied correctly, these loans are proactive and strategic tools that help sustain and maximize your medical business.