What lenders look for when financing a physician practice

When lenders size up a medical practice, they tend to zero in on operating cash flow, revenue-cycle performance and payer mix to gauge how much debt the business can reliably support.

Those benchmarks start with EBITDA and margin targets, then move to accounts receivable aging and the balance of Medicare, Medicaid, commercial and self-pay revenue, said John Pack, vice president of health care finance at Mitsubishi HC Capital America.

Physicians Practice: What sort of numbers are lenders looking at when they size up a practice?

John Pack: First and foremost, they look at the bottom line, EBITDA, earnings before interest, taxes, depreciation, and the EBITDA margin. That shows true operating cash flow before debt service, and it determines how large a loan the practice can support. It also normalizes the quirks of physician compensation, owner perks, or one-time expenses.

Typically, lenders look for EBITDA margins from 10% to 20% for most outpatient specialties. It’ll be higher for surgical or ancillary-heavy groups and lower for primary care.

Another factor is days in accounts receivable, AR aging. Anything under 40 to 45 days is very strong. If you’re looking at 90-plus days in accounts receivable, that should be less than 15% of total AR. That’s a red flag.

And then payer mix. Lenders look at Medicare, Medicaid, commercial insurance, and self-pay/out-of-network. Those are the numbers they’re factoring in when they size up a practice.