Don’t Be Scared Off From Receivables-Based Financing

Recent negative headlines shouldn’t deter you from using this valuable capitol reource BY KEITH D. REUBEN AND PATRICK L. COFFEY
In the wake of National Century Financial Enterprises’ (NCFE) well-publicized bankruptcy in late 2002, some nursing home operators might now be thinking twice about securing credit based on their outstanding receivables. Although understandable, such hesitancy could be a costly mistake for two reasons:

    1. Cash flow liquidity is the lifeblood of any business, particularly those that can recognize and seize opportunities during an economic downturn; and
    2. This type of knee-jerk reaction fails to distinguish between two distinct lending models: accounts receivable (A/R) financing and factoring. They are as different as night and day.

In fact, A/R financing from an established lender that understands the unique challenges of operating nursing homes often is the only way to overcome the “reimbursement blues” caused by slow, inconsistent payers. If your business needs a reliable source of capital to cover fixed costs, expand, or insure against slow payers, considering potential A/R financing solutions should be high on your list of priorities.

This article will explore why A/R financing is a viable option, examine how A/R lenders evaluate your creditworthiness, and show other ways you might benefit from this type of financing.

Rationale for A/R Loans and How They Work
Businesses use A/R financing primarily to meet short-term cash flow needs. A vast majority of nursing homes in the United States finance their accounts receivable. The following hypothetical example shows why this form of credit is so popular in this industry:

ABC Nursing Home is a profitable nursing facility that receives the majority of its reimbursement from Medicare and Medicaid. Although these government programs pay their bills consistently, payments usually lag invoices by 30 to 60 days. ABC’s commercial insurance payers take even longer to make payments. Because of its unpredictable monthly cash flow, ABC Nursing Home often cannot satisfy ongoing financial obligations (e.g., payroll, food, rent, etc.) in a timely manner. To ensure that it continues to operate successfully, ABC must accelerate the rate at which it monetizes its government and commercial receivables. A receivables line of credit, which provides immediate cash and liquidity, enables ABC to meet its monthly obligations.

Nursing homes have generally obtained this credit from two types of commercial finance firms. Factoring companies purchase the receivables with minimal concern as to the ongoing viability of the nursing home business. NCFE, until its bankruptcy, was the nation’s largest purchaser of hospital, physician, and other healthcare receivables. NCFE would buy the receivables, then pool and sell them in the form of asset-backed securities to institutional investors as a way to access less expensive capital.

Most receivables credit lines in this industry, however, come from traditional A/R lenders; their credit lines are based on simple formulas related to the receivables’ age. The older the account, the less likely it will be paid and the less value it has in the eyes of the financier. Generally, A/R financing companies will lend an amount equal to 85% of the net receivables of nursing home operators, up to 180 days past due. The vast majority of these receivables are from Medicare, Medicaid, and commercial insurance companies. As these receivables are monetized and new receivables generated, nursing homes create additional collateral to include in their borrowing base (see below). The dynamics of this process give A/R lenders an increasingly vested interest in the credit and ongoing viability of the nursing home operator.

Lender’s Due Diligence Considerations
Before committing to a line of credit, the A/R lender will perform due diligence to determine the amount of the loan, as well as the financial stability of the nursing home operator. This due diligence will focus on (1) confirming the potential borrower’s accounts receivable, (2) analyzing third-party payers/reviewing regulatory compliance, and (3) performing financial analysis of operations.

Confirming accounts receivable. The primary purpose of this review is to determine that the quality/quantity of the collateral is sufficient to support the amount advanced (also referred to as the “borrowing base”). Before applying the appropriate advance rate (typically 85%), the A/R lender will eliminate certain ineligible items from the base, including contractual reserves, aged receivables (i.e., those held beyond the eligibility period, typically 120 to 180 days), and private copay receivables. Since some receivables may fall into more than one ineligible category, make certain that your A/R lender takes extreme care to ensure these are deemed ineligible only once so as to not unduly limit your borrowing base.

Third-party payer analysis and compliance review. The lender conducts this review to identify clinical or Medicare/Medicaid liability issues that exist and could result in potential risk exposure to the borrower and the collateral. As part of this process, the A/R lender will (1) confirm proper licensing, (2) review current surveys, (3) perform a cursory review of cost reports, and (4) determine frequency of payment for each payer class. Note: Potential liability exposure relating to cost reports has become less of an issue as a result of the government’s transition to a prospective payment system.

Financial analysis of operations. Analysis of a nursing home’s financial statements enables an A/R lender to assess the continued viability of its operations. The A/R lender will examine and evaluate major fluctuations in the balance sheet (e.g., receivables and payables), income statements and projections, the adequacy and cost of insurance, and other factors that could affect the nursing home operator’s ability to meet its debt service and other fixed charges. If the potential borrower has had losses in the past, their specific causes and solutions will be identified and analyzed to ensure that such problems are adequately addressed and resolved.

Other A/R Financing Benefits
With a vested interest in nursing home operations, A/R lenders work with operators after a loan is consummated to ensure that their investment criteria are consistently satisfied. In the event that the nursing home operator experiences financial or operational difficulties, the lender works closely with the operator, nursing home real estate owner, and the nursing home mortgagor/insurer to ensure that patient care is not adversely affected. This will result in either: (a) im-plementing a turnaround of the nursing home with the current operator, or (b) transitioning the operation to a better-equipped nursing home operator, if requested to do so by the current operator. Experienced A/R lenders have strong relationships throughout the long-term care industry and are able to tap into this network to find a replacement operator when requested.

Only in rare instances will receivables be liquidated in conjunction with the closing of the nursing home, since such an action would leave the lender vulnerable to more unpredictable repayment streams.

Contrary to popular belief, nursing homes that have a mortgage or HUD loan may still be eligible to receive A/R financing, since the A/R lender does not ordinarily rely on or mortgage any portion of the real property for its collateral. In fact, nursing home operators with working capital loans are less likely to default on their mortgage loans or rent because their A/R lender can help the mortgage/HUD lender by:

  • Performing significant financial, regulatory, and clinical due diligence
  • Monitoring the nursing home’s key operational and financial performance indicators
  • Identifying problem loans for the mortgage/HUD lender

A/R financing can provide nursing home operators with much-needed liquidity in a world of rising costs and irregular government payment cycles. If your business demands consistent cash flow or insurance against the uncertainty of delayed payments, it’s an option that should receive your careful consideration. NH

Keith D. Reuben is a director of healthcare investments, and Patrick L. Coffey is an investment officer, at CapitalSource Finance in Chevy Chase, Maryland. For further information, visit; contact Reuben at (301) 841-2738 or; or contact Coffey at (301) 841-2860 or To comment on this article, please send e-mail to

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