A hire purpose

Business success for private clinics calls for appropriate financial support. Mike Nolan considers the funding options available to help drive practice growth and expansion

The private healthcare sector is diverse and vibrant and independent practice can be extremely rewarding professionally and monetarily. But there needs to be prudent financial management to back it up.

Revenues are offset by significant overheads, from staff remuneration and premises to IT, insurance and medical equipment costs. Tough decisions are often needed about how to best establish and expand operations.

Medical equipment is invariably highly specialised and frequently expensive, whether investment is needed for state-of-the-art diagnostics or radiosurgical equipment, CT scanners or laser treatment machines.

While there is improved liquidity in the banking sector, the fallout from the recession has made it more challenging to raise buying finance for many practices.

The leasing solution

For many, an upfront capital outlay may not be a viable option. Despite the strengthening economic recovery, reports suggest bank lending is still anaemic.

But alternative options are available and, invariably, equipment finance can be secured, allowing money to be retained in the practice’s cash flow.

Leasing, rather than buying and paying upfront, will often prove the most affordable option, spreading equipment costs over a three- or five-year period through regular monthly payments.

What’s more, a cash flow analysis will highlight potential returns on investment (ROI) – and these can prove substantial. A lender with good knowledge of the market will be acutely aware of any potential ROI that new equipment may generate and will therefore be more likely to provide approval.

In certain cases, the equipment will be in place before the borrower has even been required to make a payment, allowing them to immediately reap the rewards from greater revenue streams.

And making timely, regular payments can also help to build a strong credit history.

Operating leases, regularly arranged for NHS organisations, can also be taken by private clinics – enabling equipment to be financed without being reported on the practice’s balance sheet.

Instead, they are treated as expense items in the profit and loss account and so are not regarded as liabilities that might affect future borrowing.

Operating leases are also useful if a practice needs equipment to be frequently updated or replaced, with the lessee having use but not ownership of the equipment – the residual value belongs to the lessor.

Borrow against your assets

A practice’s hard assets, such as  advanced diagnostics or aesthetic medical equipment, have a clear value that can be exploited to release working capital.

If an asset finance specialist believes an organisation’s business plan is sound and the debt can be adequately serviced, it will lend money against existing equipment without the need for further securities.

Typically, lending will be arranged based on a fair valuation of the equipment and the amount of debt serviceable.

In the event this debt cannot be serviced, the practice will be given the chance to sell the equipment itself, ensuring a fair and adequate price is received.

This kind of arrangement can even apply to equipment which is not unencumbered and still subject to existing finance terms.

In this case, the financier can lend money to spread the payments over a longer term, reducing monthly outgoings and providing more financial flexibility.

This might also be a viable option when attempting to fund equipment which has limited resale value, such as an office phone system.

In these cases, it may prove difficult to borrow money for the equipment itself, but the financier may decide the potential ROI from implementing such equipment makes it a safe investment.

As a result, finance may be offered with a charge on the company’s hard assets, allowing cash to be freed for the purchase of the new equipment. By using cash, it may even be possible to negotiate a further discount with the supplier.

Borrow to buy

In certain cases, acquisition – from a retiring specialist, for example – may represent the best option to achieve expansion plans and increase market share swiftly.

This would include buying a property’s lease or freehold in addition to equipment and facilities. It may also include a practice’s goodwill, although restrictions apply to the sale of goodwill for those GP readers of Independent Practitioner Today who hold NHS contracts.

There is no shortage of opportunities here either and the necessary funding can be raised against the acquiring practice’s book debts, hard assets or, occasionally, even the soft assets.

Mike NolanSuch funding is two-fold. First, the acquiring practice must find the necessary finance for the deal itself and then secure sufficient working capital to ensure the move does not end up putting both operations at risk.

This extra working capital could be used to cover relocation costs, bringing the two practices under one roof to benefit from greater economies of scale.

Usually, such expenses would be drawn from cash flow, but, by borrowing against assets, this situation can be avoided, providing the financial flexibility to cope with any issues arising from the new venture.

Mike Nolan (right) is managing director of Academy Leasing