October 23, 2019
For decades our firm has recommended that physicians secure a line of credit as part of good financial management. We recently spoke with Kevin T. Wills, CPA, CMPE, Sr. Vice President of Healthcare Business Banking at PNC Bank, to hear his take on why practices need this important financial insurance and the basics of obtaining it.
Kevin, why don’t you first explain what a line of credit is.
A line of credit is credit that’s established with a bank in advance of needing it. This allows you to borrow money on demand, in a variety of different ways, without having to access a banker every time. For example, you can write a check to advance funds from the line of credit. The practice determines when and how to use the funds, and doesn’t have to apply for a loan each time it needs the money.
How does the money from a line of credit get paid back?
The practice has some control over the payback of the money, depending on the arrangement made. That payback is typically interest-only with the practice directing when the principal is paid down. Ideally, the line should be paid down to $0 at least once during a 12-month period. The idea is that you draw the money to cover short term capital needs, and once those are met and cash flow is moving again, you replenish/repay the line.
Why should practices apply for a line of credit?
There are a couple of reasons, but the main one is to guard against cash flow slow-downs at certain times of the year. Often, these are predictable – like first the first quarter of the year when you are waiting to be paid on patient accounts receivable because patients’ new year deductibles aren’t yet met. The line of credit is there in case you need it to cover payroll, for instance, when patient collections aren’t rolling in.
Another common use of the line of credit is for unanticipated expenses. Like when a vital piece of equipment breaks. If the X-ray machine goes down, you need to get it back into service quickly. Having a line of credit in place for these kinds of realities is a safety net that supports the practice’s day to day operations.
I imagine that physicians just starting in practice might also use a line of credit for startup expenses?
Yes, for those physicians just starting out, a line of credit is an essential part of getting the practice open and can help fill in cash flow uncertainties in the first several years.
Are there other reasons you see physicians use a line of credit?
A number of our clients use their line to fund contributions for retirement plans. It allows them to fully fund their retirement when filing taxes their taxes, then pay down the amount borrowed over the remainder of the year. And, I see some practices use their line of credit to purchase vaccines or buy and bill medicines because the upfront cost of these items can be quite large with revenue being recognized over a longer period of time.
I assume there is an application and approval process. How far in advance should a practice apply for the credit?
Well the worst time to ask for a loan is when you need it immediately. So if a practice doesn’t currently have a line of credit in place, they should get in touch with a banker now and get the process started. That way, everything is approved and in place when there is a need to support the practice’s cash flow.
The best time to fix the roof is before it starts raining.
Right. And it’s not that you can’t get a line approved quickly if you are in a jam. But it’s best to have things in place before you need the money.
How long do most practices maintain their line of credit?
Typically, a practice will renew the line of credit on an annual basis. If the practice has a good history of on-time payments, the line typically renews automatically each year.
What’s the cost for something like this?
It’s very affordable. Establishment of a line has nominal origination fees at most banks. There is an annual renewal fee that is typically 0.25% of the line of credit amount. So, for a $100,000 line of credit, that’s $250 per year. Depending on the size of the line, you may be required to secure it against the assets of the practice. And some states require a small filing fee for that. For example, in Illinois, it’s $93.
Any final advice to physicians on this topic?
There’s no reason most practices shouldn’t have a line of credit available. It’s great protection when there is financial uncertainty. Even if you never need to draw on it, $250 per year is a very low cost for the financial insurance it provides.