When Should I Seek Financing for My Clinic or Hospital?By Fernando de Obeso | Wed, 07/15/2020 - 09:13
He who owes nothing has nothing …
That is one of the most-used paraphrases in stores that sell us electronic devices through weekly payments almost in perpetuity and without being told openly how much we are going to pay in total, which can end up being two or three times more than paying cash.
Although this negative perception of credit is more or less frequent, it excludes one of the most important questions that must be asked before applying for any type of financing. How much will I earn by asking for this resource? It is clear that when it comes to a television or some other consumer good, the economic benefit is very low, since these are precisely consumer goods. But when it comes to a company, the question has an important relevance, since many times the benefit of obtaining this financing is much higher than the financial cost of it.
Financing can be a catapult for your business by using someone else's money to grow your clinic or hospital with good planning. Many times, though, there are doubts about how, when, and how much I should ask for.
Let's start with an important and often confusing distinction. There are two basic ways in which a company can receive money. One is via capital and the other is via debt. In this text, we will focus on the basic debt options, but let us start with this distinction.
Capital. These are resources that are injected into the company and that are reflected in the capital part of its financial statements; that is, the natural or legal person who puts capital into a company receives shares in exchange. Of course, these share can come with dividends, which are the distribution of profits agreed by its shareholders. To get back the money invested, the shares have to be bought by the same company or by someone else. This resource does not generate interest since the shareholder seeks to increase the value of his shares and/or receive dividends.
Debt. These are obligations that the company acquires to pay the person who has provided the loan at a certain time and under certain conditions. In the case of debt, there are several types, and similar to a medical tool or instrument, each one has its uses, advantages and disadvantages. In this article, we will talk about the two most used types, credit and leasing.
Credit. It is the most common type of debt, which in turn can be divided into simple and revolving credit.
Simple Credit. These are loans that are paid with a certain frequency. For example, monthly, and interest and principal are paid. There are different ways to structure simple credits, but this is the most common.
Revolving credit. These resemble a credit card since you have a total authorized amount and you are paying or using this line up to a maximum, and just like the simple credit you also have to make monthly payments, according to the amount and conditions.
Leasing (Pure Leasing). These are financing tools that are structured as a rental contract. That is to say, the lessor buys the equipment (that the client wants) and it is rented to the clinic or hospital. In this case, the client is paying for a rental where at the end there is a “residual value” or final payment option on the lease through which the equipment is sold back to the client and becomes his property if the client decides to do so.
Leasing is one of the forms of financing that has grown the most in the country in recent years because it has important tax benefits, including that each monthly payment is 100 percent tax deductible. Additionally, the lease, which is normally for the purchase of equipment that generates income for the company, is widely used because if well-structured, it allows the equipment to “pay for itself.” It is for this and other reasons that for the purchase of productive equipment, the lease has more advantages than credit.
The quick answer as to when you need a loan is almost always "when I have no money," but the reality is that it is an important decision that must be analyzed from different perspectives and that will depend on the destination and the reason why you do not have that necessary resource.
When we talk about credit, either simple or revolving, the "when" depends much more on the destination than with other types of financial instruments. These resources may be used to pay for operating expenses, such as payroll, wages or electricity, or for remodeling or expanding a hospital, or they may be used to purchase equipment that will give the company greater income.
As a general rule, if the money from a loan is going to be used to pay expenses that are temporary or one-time – such as a remodeling – or to purchase equipment, the time can be now, as long as he hopes that this investment will translate into more hospital revenue, more patients, or more and better types of studies or surgeries. Otherwise, it is convenient to wait for better economic conditions or to restructure expenses.
In the case of leasing, the “when” does not depend on the destination since the destination is clear when it is for the purchase of equipment that generates income for the hospital. A good leasing scheme allows the income generated by the equipment to pay the rent of the lease, which is to say that it is paid alone.
This way of structuring financing, together with tax deductibility, makes leasing in general terms a better option than credit for purchasing productive equipment. The answer of when to lease, then, becomes “at any time.”
The "how much" will again depend on the destination of the resource. In the case of credit, the additional payment of interest and principal must be paid from current income. If the loan was requested to resolve a liquidity issue due to problems with the business (as is very common now with COVID-19), such as late payments from customers, or increased costs for materials, great care must be taken. It is highly recommended to carry out a financial analysis to determine if the business still has the ability to fulfill the contracted loan payments, despite the fact that income may fall or if customers or insurers fall further behind on their payments.
In the case of leasing, the analysis is similar, although it is a little easier since analyzing the fall in income only from leased equipment is less complex. For example, an analysis can be made before purchasing a CT scanner via lease to determine the minimum number of patients requiring an average CT study and confirm if this number is sufficient to pay the monthly rent. Because they are productive assets, each device can be analyzed as a "business unit" that leaves money for the rest of the hospital. It goes without saying that if the CT scanner in this example leaves even a small amount after payment for use by the rest of the hospital, it makes sense because it helps pay the fixed cost.
To conclude, requesting financing is not in itself good or bad, it depends on the how, when and how much, like many other things in business. However, as the shops say, "Whoever owes nothing has nothing ..."