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How to Obtain Financing for Your Hospital or Clinic

By Fernando de Obeso | Tue, 04/06/2021 - 13:01

Obtaining financing for many small and medium-sized hospitals (SMHs) is difficult and time consuming. Part of this situation can be blamed on the banking industry but not all of it. Here are some recommendations on how to prepare your SMH to receive financing.

Common Pitfalls

1. Not having reliable financial statements or accounting information

Often, we see our clients neglecting the accounting and financing aspect of their business. We have encountered successful, growing SMHs with basically no reliable financial information. This is because many founders of SMHs do not have a finance or business background. They are doctors, so they often fail to see the purpose of this information.

What is the solution? Ensure your accountant provides you with reliable and “real” financial statements. Many accountants are usually just focused on making sure the SHM pays its taxes on time and has no issues with the tax authorities. This is an important aspect, but it is not the main purpose of having financial statements. The main purpose of having financial statements is to be able to monitor the “health” of the SMH. Having a monthly analysis of the three main statements (balance sheet, income statement, and cash flow) is a must for any company to measure its performance and should be requested from the accountant for the owners to see every month.

If you do not have reliable financial statements, how do you expect an outsider to know the health of your business and be able to grant you financing?

2. Using debt to finance the start of the SMH

Many SMHs started as a one-man show, a prodigious physician who had a loyal and growing patient base that allowed him or her to gather enough capital to start maybe with some partners a small clinic. On the advice of their accountants, most of the capital investment done at the beginning was done as a “loan” from the shareholders to the company and thus allowed them to retrieve such money if needed without having to incur a capital gains tax. This sounds fine and dandy at the outset, and I am sure it is a common recommendation from clever accountants, but as the clinic grows it creates some serious problems that can hinder growth.

Why, you may ask; after all money is money. But as you may recall from a previous article, a company has assets (things it owns or controls) and those assets come from two sources: either you put them in invested as capital or equity or you owe them because you borrowed them. It turns out that in the financial analysis and credit world, owing something (debt) is not the same as having invested in them. It’s obvious that having a car you fully own is not the same as “owing” that same car.

The main problem this creates is that if a company is primarily financed via debt, it means the majority of the things it has assets are claimed by someone else the debt-holders therefore, if you plan to lend them money, the money you lend this client has to be in line with the other debt-holders and this obviously creates a higher risk of default not being able to pay their debts on the part of the client.

How can an SMH avoid this pitfall? The solution is simple: capitalize your company. In other words, if you initially funded the creation of the company via debt from shareholders, “capitalize” such debt and reflect it in your financial information as equity. At the end of the day, there are many more ways to retrieve your money from the business. Any accountant can make this capitalization and formalize it via a corporate lawyer. This will reap many benefits in the future as it will be easier for the SMH to obtain financing.

3. Not having a finance person

It is quite common for an SMH to merge three different management areas accounting, finance, and administration into one. When starting, it may make sense to have a “one person does it all” organization chart. But as the SMH grows, these three areas are very distinct and have clear responsibilities and purposes.

Accounting’s main job is to assess the current situation of the SMH. Their job is to prepare and create the three main financial statements (balance sheet, income statement and cash flow). Also, their job it to make sure the SMH has a sound tax strategy in accordance with the law. Like a radiologist, their job is to obtain a “photo” of how your business looks. They must make sure the picture has good resolution, covers all the angles and is clear.

Administration’s main job is to make sure the machinery is oiled and working. It must make sure suppliers are paid, payroll is met, and patients and insurance companies pay on time. It is a very distinct responsibility from accounting and finance and its purpose is to make sure everything runs smoothly. Allow me the analogy of a biomedical engineer in whose job it is to make sure the CT scanner is running correctly.

Finally, the main job of the finance department, unlike accounting, is to see how the company will perform going forward. In other words, among its responsibilities are to project the needs of money, equipment purchases, and human resources projected forward to sustain the growth of the SMH. So, using my previous analogy, it is like the gynecologist who after receiving the CT image that the radiologist performed determines a course of action for the patient and prescribes the appropriate “medicine.”

As you can see each function has its clear purpose or role. So why does an SMH usually not have a financer person? Or why do they delegate this function to the accountant? My intuition tells me it is because of a lack of information regarding the relevance of such a function.

So, the simple solution would be to hire someone with such skills, but this can be hard to justify, especially in a small organization. The possible solution is to have an external financial consultant. This person does not have to be a financial guru, just someone with a good proficiency in financial projections and Microsoft Excel. This person can create financial scenarios that can “forecast” possible liquidity problems or determine how much the SMH can invest in new areas and equipment and ways to obtain the resources for such needs.

Avoiding these pitfalls may not guarantee that you obtain financing for your SMH but it will surely increase the likelihood, as you will certainly stand out and provide more certainty and confidence to the financial analyst about your repayment potential and viability as a business.

Do you need financing for your hospital or clinic? Contact me at fdeobeso@saludfacil.org.

Photo by:   Fernando de Obeso