Financing maneuvers: two opportunities to boost a hospital's working capital.

Spiraling expenses, declining profits, and continued cutbacks from third-party payers increasingly limit a healthcare facility's access to capital. As a result, only a small percentage of the approximately 6,700 hospitals in the marketplace have obtained investment grade credit ratings. Current

Commercial banks are the traditional source of working capital across most industries and provide short-term financing opprotunities for hospitals. When a hospital obtains working capital from this source of unsecured lending, the amount borrowed and the cost of financing often speak to the credit-worthiness of the hospital.

With access to capital and short-term financing now difficult or expensive to obtain, health care needs creative financing options. Accounts receivable, a large and growing asset on a typical hospital balance sheet, offers several financing opportunities. While common-place in other industries, however, receivables financing in health care remains a controversial and misunderstood topic.

Estimates place net receivables available for initial financing between $50 billion and $60 billion. On a continual basis, gross revenue available for periodic financing approximates $240 billion to $260 billion, or $160 billion to $175 billion on a net basis.

While receivables financing may not be right for every healthcare organization, benefits of this form of financing often are overlooked. And two distinct accounts receivable financing techniques, factoring and asset-backed securitization, often are confused.

Factoring

Factoring accounts receivable has been practiced for centuries but gained prominence in the early 1900s in the textile, apparel, and home furnishings industries. Factoring emerged as a means for companies to receive immediate cash flow and eliminate problems involving credit and collection of accounts.

In a factoring transaction, a factor (purchaser) assumes a client's credit exposure and risk of non-payment for financial reasons. Factors rely on their credit and collection experience to minimize potential financial losses.

Factoring in health care, a relatively small portion of all factoring business, is dominated by a few firms. In a typical healthcare transaction, eligible net receivables, defined by the factor, are purchased at a discount from face value. Discounts between 5 percent and 10 percent are not uncommon in health care. Cash collections resulting from the difference between the face and discounted values of the purchased receivables are passed on to the factor.