Medical practices can be lucrative businesses. That’s why banks consider them good credit risks. However, it is expensive to operate a medical practice, and cash flow can be irregular—especially in today’s medical billing environment.
“Sometimes at the beginning of the year, when patients are paying down their deductibles, you may have trouble collecting,” says Katherine Watts, partner in charge of healthcare services at Horne, LLP. Other times payers may delay claims, or you may have to resubmit some claims. This can leave you temporarily short of cash. At these times, it’s useful to have a source of credit to tide you over until receivables rebound.
A line of credit is similar to a business credit card, but there are some important differences. With a credit card, you typically pay a fairly high interest rate, whereas with a line of credit you can usually get much better rates.
A line of credit is also similar to a term loan (a loan that you take out for a fixed period of time) because you are preapproved for a set amount of funds. Your line of credit gives you access to borrow that money whenever you want, and you only pay interest on what you’ve borrowed.
Like a credit card, the money is immediately available whenever you need it. You don’t have to reapply each time you need cash. Instead, you just draw on your credit line. Once your cash flow improves, you pay it down. In some cases, a business line of credit can be tied to the equity in your business or your real estate.
Your line of credit can come in handy if you need to buy or replace equipment, too, especially those unexpected charges. Equipment loans aren't difficult to obtain, but they still take time. You have to fill out an application and wait for approval. With a line of credit, you can buy what you need and get back to work.
Though a line of credit can be a lifesaver, you do need to be careful. It can make it almost too easy to borrow money. Be sure you draw on yours only for necessary expenses and be sure you have enough funds budgeted for paying it down.
“One mistake a lot of practices make is not doing a financial analysis before purchasing new equipment or expanding the practice,” Watts says. “A lot of people focus on being able to expense the purchase and getting tax benefits, but you have to think of whether or not it makes good business sense.”
If used prudently, a business line of credit can make the difference between struggling or skating through hard times.