Many businesses are continually adapting to rising expenses, thinner margins and the evaporation of pandemic-related government funds. Skilled nursing centers and other healthcare facilities, which received much-needed financial support during the pandemic, are also facing sustained labor shortages and higher costs. A common tool for this industry – working capital loans – can be a lifeline for healthcare facilities facing these challenging circumstances.
“There are many different kinds of asset-based lending, which are also called working capital loans or lines of credit, that lend on a variety of assets such as inventory, machine equipment or even real estate,” says Kim Gordon, a senior managing director at Greystone Monticello. “We lend on accounts receivable for our working capital loans.”
At Greystone Monticello, working capital loans are available for healthcare facilities, primarily skilled nursing facilities.
“Typically, we provide working capital loans to healthcare facilities that might be in the midst of a transition or an acquisition to help support the start-up expenses or other day-to-day operating expenses,” Gordon says.
How working capital loans function
Essentially, a working capital loan works like a credit card or a line of credit, Gordon says.
“When a skilled nursing home bills patients, it can take 30, 60 or 90 days for Medicare or Medicaid or the insurance company to reimburse them,” Gordon says. “In the meantime, they have to meet payroll and pay other expenses. With a working capital loan, we give them a certain amount of money in advance based on their accounts receivable.”
Typically, the working capital loan is available for 85% of eligible accounts receivable.
Interest rates on these working capital loans are priced competitively with other healthcare lenders, Gordon says. Borrowers may also pay a fee based on the difference between the maximum limit and the amount they borrow.
Working capital loans require a minimum term of one year, but typically they have a two- or three-year term. Many companies renew their working capital loans multiple times.
“The working capital loans are usually co-terminus with mortgage debt,” Gordon says. “The idea is to have a working capital loan function alongside a mortgage for three years up to as long as five years.”
Qualifying for a working capital loan
While the focus for working capital loans is the accounts receivable for a nursing home or another healthcare facility, the loans are underwritten similarly to a real estate loan.
“We look at the overall credit quality of the transaction, including financial performance and quality of the operator and/or the owners of the facility and their ability to operate that facility or a similar one,” Gordon says. “But the deepest analysis is of the collectability of the accounts receivable. If for some reason the client does not perform, we need to know we could be repaid by collecting the accounts receivable. We analyze bills submitted to Medicare, Medicaid and commercial insurance companies to see how much the healthcare facility historically gets paid.”
Healthcare lending is a very specific niche, Gordon says.
“Some banks and other lenders without experience with Medicare and Medicaid have a negative opinion because the accounts receivable are tied to the government,” Gordon says. “Unlike in healthcare, if you were a manufacturer selling a product to the government, you would have to do an ‘assignment of claims.’ We do not do that. Generally, with Medicare and Medicaid, if everything is done correctly, the payments based on stated rates for services rendered will be paid.”
Medicare and Medicaid will only pay operators directly and will not remit payments directly to a lender.
“We set up a bank account with borrowers to control the cash flow and sweep the money so that it cannot be used by the borrowers for any other purpose,” Gordon says. “We also set up an intercreditor document which is HUD compliant so that borrowers can easily keep the line of credit if they take the loan to HUD.”
Fluctuating landscape of healthcare finance
Healthcare lending is a specialized niche within asset-based lending because of its complexity, Gordon says.
“One of the main risks is the constant change with reimbursement and the regulatory environment,” she says.
In previous decades, asset-based lending often had a negative connotation and was viewed by many borrowers as the “loan of last resort” because of the level of control lenders have with this type of financing, Gordon says.
“Today, more business owners see how working capital loans can fill a need and act as a bridge to help finance short-term cash flow needs,” Gordon says. “We have some clients who rely heavily on their working capital loan and borrow every available dollar, while others may only use it to cover payroll. Many of them want a working capital loan because they are doing an acquisition and want the extra cash available during the transition.”
Naturally, the pandemic impacted skilled nursing centers and their finances.
“Initially there was a lot of concern about access to capital and how we would continue lending to the nursing homes during this unprecedented period,” Gordon says. “But instead of usage going up, it went to almost zero on most of our lines. The skilled nursing industry received a lot of government support including PPP loans and stimulus dollars to support their businesses.”
The financial picture shifted again in the past 18 months because of inflation and the end of stimulus programs. Now, Greystone Monticello is seeing an increase in requests for lines of credit and usage of existing lines is back to historical levels and, in some cases, higher levels. From December 2020 to July 2023, the total line of credit commitments for Greystone Monticello increased 59%, with the total number of borrowers increasing by 48% for the same time period.