Why midsize practices hit a bank-financing ceiling

Midsize physician practices can find themselves stuck in a “lending no-man’s-land,” too large for many local and regional banks but not big enough to attract large-bank interest without private equity backing.

That’s especially true when lenders focus on hard assets and grow wary of what they see as volatile, constrained cash flow, said John Pack, vice president of health care finance at Mitsubishi HC Capital America.

Physicians Practice: Why do surviving midsize practices often hit a ceiling with traditional bank financing?

John Pack: I’d define midsize practices as somewhere between the $10 million or $15 million mark up to about $100 million or $120 million. They can get stuck in a lending no-man’s-land. Local and regional banks have facility limits that are too low, while large banks aren’t interested unless the practice is much larger or backed by private equity.

Banks still lend primarily against hard assets, buildings, real estate, equipment. And there’s what you’re going to hear me say a lot today, constrained cash flow. That’s been the hot button over the last 10-plus years with traditional bank financing for practices. Bank underwriting requires predictable cash flow, and health care cash flow is predictable over the long term, but banks view it as volatile because of payer-mix changes, reimbursement cuts, and delays in collections. That’s where I’d say midsize practices hit the ceiling with traditional bank financing.