Receivable Finance

{4:05 minutes to read}

When a business desires to raise capital for either expanding the existing business or Receivable Finance | Ian Lifshutzentering into new ventures that require additional revenue, the most common route is financing. However, equity is also an option that should be examined.

As to which is more suitable, that is based on the situation of the business as well as any possible regulatory requirements.

Equity Route

Equity, and giving pieces of a company to an outside investor, may be advisable. However, depending upon the terms of the arrangement, the owners have to be very clear as to whether they’re giving up control and shaping the future of their business or company, or just adding a minor equity partner.

Additionally, and very importantly, it is not always possible to give up equity. There might be a very limited number of persons available who can purchase due to regulatory and legal issues. For example, in the case of a NY medical practice, the only person who can own an interest is someone with a similar license, such as another physician.

Some healthcare entities do permit ownership by non-physicians and lay people. For these, this route may still be viable, but it is a concern. This option would be more likely available to them, as well as typical ancillary healthcare services.

The biggest benefit of equity is that it does not create any liability for the entity. It usually simply provides a share of the revenue depending on the negotiated arrangement. However, the investor is tied into the business and it is difficult to undo such an arrangement if things are not running as expected.

Debt and Loan Route

On the other hand, in the health professions, taking on debt such as a loan, line of credit or borrowing against receivables, is often difficult as well. This must be analyzed carefully because it depends on the collateral, the strength of a practice and its receivables or any medical business.

If receivables are those typically seen as not very valuable or secure, such as any no-fault receivables, Medicare or Medicaid (which cannot be assigned or liened in the traditional sense), the value to a lender is significantly lower as it presents a much greater risk.

HMO and private third-party payer receivables are typically the strongest and would generate the greatest loan value.

It is very important for a practice or other business to evaluate itself prior to entering into any such negotiations either by valuing its receivables or by valuing its equity as if it were going to be sold. This allows the business to have an idea of what value it is giving up or offering to any potential investor or lender.

Additionally, the business needs to take careful consideration to be sure there is an exit strategy from the investor or loan, if it ever becomes apparent that it is no longer beneficial to maintain the relationship.

Such arrangements should not be entered into lightly, but should be discussed and analyzed since they can impact the operation of the business itself as well as any future sale or transfers of ownership. It can also affect any future plans of the owners of the practice/healthcare business.

 

Ian Lifshutz
i.lifshutz@lifshutzlaw.com

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