How to choose a bank for a line of credit

Like most small and medium-sized businesses, your medical practice may, at times, require a line of credit or a loan. But you present a lender with a much different set of circumstances than most other types of businesses. Net income and cash flow are critical factors in evaluating the financial strength and ability for a business to make payments. As a medical practice, these primarily depend on your efficiency in collecting funds from insurers. The more your practice maximizes the effectiveness of your billing systems and mitigates the built-in financial risks of this business model, the more attractive you will be to a lender.

Where do you turn for this financial support? If you do some searching for medical practice loans, you’re sure to find a number of national or regional online lenders that can provide you with funds virtually sight unseen. However, like many small businesses, you may need more than just immediate access to funds. You may benefit from having a long-term lender that can also act as a financial adviser because it understands the unique nature of your business and the specific characteristics of the market you serve.

One option is a community bank where your practice is located. Community banks pay close attention to local demographics and economic conditions, likely the same factors that influence the makeup of your patient load and payment mix. When these elements shift, community banks can anticipate the impact on their customers, including your medical practice.

However, being local does not make every community bank equal in its ability to serve you. Whether you are approaching a bank or they are approaching you, you need to conduct your due diligence to evaluate how well a bank is positioned to serve you. Here are five questions you should ask during the early stages of your discussions.

1. Do the bank’s commercial loan officers have experience working with medical practices like yours?

A bank that already provides financing to medical practices deserves consideration. However, medical practices in the same community can differ in terms of the demographic markets they serve, their patient loads, payer mixes, and overhead-all of which impact their need for and allocation of funds. A bank that has worked with practices similar to yours in terms of size or specialty is likely to have a better understanding of your anticipated cash flow, ongoing financial requirements, and revenue stream.

2. Does the loan officer understand that your claims payment and net income is largely impacted by your particular patient profile and payer mix?

The claims evaluation procedures and reimbursement levels among the insurers you accept may vary greatly and can frequently change. If you serve patients covered by Medicare, Medicaid, supplemental, employer, or private insurance plans, you are most likely submitting hundreds if not thousands of claims monthly to multiple payers and monitoring those collectibles. If your patients are primarily covered by private insurance, the claim payments could be larger but require more time. This impacts your cash flow.

Your bank must understand how effectively your practice manages claims submissions and monitors collection rates. It must also recognize that your approach cannot automatically be compared to a similar practice in a different neighborhood or perhaps a practice in a different specialty.

3. Does the bank fully understand your billing process, ongoing financial requirements, and financial management procedures?

If your practice is successful, you no doubt spend considerable time dealing with the health of your patients. Still, you recognize that you are primarily responsible for assuring the financial health of the practice, including your ability repay loans or meet longer term financial obligations.

You need a bank that supports the steps you have taken to manage billing, collections, equipment financing, technology systems, business and malpractice insurance, staffing needs, and other aspects of your business. It should appreciate your decision to have a comptroller or rely on highly-competent staff to deal with these critical business issues on a day-to-day basis. Perhaps you have even retained an outside firm to handle billing and collections. Regardless of your approach, you require a lender that understands how your approach to managing your practices finances results in your ability to meet your financial obligations.

4. What if you need funds to expand your practice?

Perhaps you are planning to add more physicians, expand into another community, or build or rent more office space. You will need funds to purchase or lease equipment and fixtures, hire more support staff, and pay other recurring or one-time costs. When considering your ability to handle this debt, you want a bank that will accurately take into account your practice history, medical specialty, and professional standing at your current practice as well as your plans to build and maintain a patient load and/or revenue stream through your expansion.

5. Adding physicians should increase revenue, but does the bank understand that billings for those doctors will initially be delayed?

New physicians joining your practice, especially those whose patients follow them, may quickly begin to generate billings. However, they must file new applications with the insurers you accept before claims are paid. This could require 90 days or more. This is more or less the same for all practices, but the bank must understand these circumstances when providing you with working capital or a line of credit to support new doctors.

This is a challenging financial time for medical practices. The cost of providing patient care, including equipment, personnel, administrative technology, and facilities is constantly rising. Meanwhile, claims payments levels and time frames require constant monitoring to maximize revenue. Practices that seek additional funds will find no shortage of lenders offering to finance their business. But they need to carefully review and identify which bank can understand and support their specific needs.

Chad Pfeif is a branch president who specializes in providing financing to medical practices. He is an alumnus of The Graduate School of Banking at Colorado.