In the life cycle of every healthcare business, there comes a time when capital is an issue. Whether it’s to make payroll or expand to a new territory or acquire another business, access to capital is an issue every business owner faces. You should have several different financing options available depending on the stage of your business. It’s important to understand all the different types of healthcare financing so you can figure out which one is appropriate for your situation.
Debt financing for healthcare
Line Of Credit (LOC)
A LOC is a flexible way to borrow money to get the business through cash flow shortages. The bank issues you a line of credit (the amount) that you can borrow against and then pay down the line on your schedule. For example, if the bank provides you a line of credit in the amount of $150,000 you can borrow up to that amount, pay a portion or all of it back, and then borrow again.
A LOC is helpful for running your business when cash flow might be delayed because of slow payers or your business requires extra working capital to meet a growing demand for your services. You can borrow against the LOC and then pay down on the line as your accounts receivables comes in. To get a LOC for a healthcare business, you typically need to guarantee the loan with personal assets. Traditional lenders are a bit scared of the healthcare industry and are usually unwilling to give out these loans without a personal guarantee.
If a bank is unwilling to provide a sufficient LOC, you can also sell your current, but uncollected account receivables. Factoring is the process of selling your receivables to a financial firm so you get paid right away. The financial companies that buy (factor) receivables will allow you to sell or “borrow” up to 80-90% of your current receivables. However, factoring is a very expensive source of financing and should only be used as a last resort for your business.
A term note is a loan from the bank or lending institution for large purchases or capital requirements. Healthcare businesses typically use term notes to finance the purchase of a new business or to start new locations. Term notes are paid back typically through monthly or quarterly installments, but some institutions allow for balloon notes. The term note application requires that you show you would be able to pay down the note over time. Financial institutions that provide term notes conduct in-depth due diligence on the borrowing company, its owner and the business or asset being acquired. Term notes are usually secured by the assets of the business, but sometimes personal guarantees are required.
If during an acquisition you can’t borrow the full amount with a term note, you can borrow the rest of the money with mezzanine debt. Mezzanine debt is unsecured and subordinate to a term note, meaning if your healthcare company goes bankrupt, you would pay off the other business debts first before paying off the mezzanine debt. In exchange for this extra risk, mezzanine debt charges a higher interest rate. This debt can also have an equity feature where the debt issuer receives shares of your healthcare company along with the loan payments to make up for the extra risk.
Equity financing for healthcare
Angel investors are wealthy individuals looking to invest in a company. They typically invest during the early stages of a healthcare business when it’s just starting up. These investors are looking for the next big innovation in healthcare and want to get in early. Typically, angel investors are looking to own 5 to 20% of a company in exchange for their investment. DealZumo has the largest database of angel investors interested in the healthcare industry and is a good place to look if you’d like investors to help you launch your healthcare venture.
Venture capital funds look to invest in healthcare businesses once they have started generating revenue and are in growth mode. However, there are some venture capital funds that will invest in start-ups if the company has a proven executive team. Venture capital funds provide the extra money needed for a healthcare company to expand and reach a new level of growth. Venture funds usually look to buy 20 to 40% of a healthcare business in exchange for their investment.
Private equity funds make the largest investment and look to get involved once a healthcare business is fairly mature. The private equity fund wants to get involved at this later stage because there is less risk but they still believe the company can achieve significant growth over a 3-7 year period. A private equity fund looks to buy the majority of a healthcare business they invest in, around 80%, leaving 20% to the original owner. Private equity can be a good way for you to begin exiting your company when you’d like to sell.
No matter which source of healthcare financing you use, it helps to work with a lender or investor who understands the healthcare industry. Dealzumo has one of the largest online databases of both healthcare lenders and investors to help you access all types of financing at reasonable terms.