Finding Financial Flexibility

• By Kurt Schmitz
• Jan 29, 2008

Providers must develop relationships with banks and equipment financing companies to keep competitive.

The HME market is always changing, and it is important to remain flexible when faced with change. Finding the right combination to fund your company in an effort to become more “financially flexible” is more important now than it has ever been in the past. Our market is faced with many challenges that include Competitive Bidding, potential respiratory and rehab cuts and accreditation.

Developing relationships with a bank and an equipment finance company are keys to becoming more flexible. Some businesses today have a bank relationship or use an equipment finance company on a consistent basis. In today’s environment it’s important to use a combination of the two in order to achieve financial flexibility.

Don’t wait
Establishing a line of credit with a bank lets you cover any shortfalls you may experience in your cash flow. The best time to establish a bank line of credit is not when you need it: You need to be prepared for potential shortfalls in your cash flow, so establish a bank line sooner rather than later.

Within the HME industry, there are many reasons cash flow issues may arise. They can vary from losing a contract, delayed reimbursement payments, government cuts and they can even occur during times of growth.

All too often we see a company waiting until its cash flow is weak before it attempts to establish a bank line or a lease line of credit through an equipment finance company. Establishing a bank and lease line of credit in advance can help your company maintain a consistent cash flow.

Financing or leasing your capital equipment can reduce large cash outlays and allow your company to pay for it over time.

Put the money to work
Once you establish the bank and lease line of credit, you need to use them to your advantage and get the most out of them. Structuring your equipment lease to match the reimbursement period allows the equipment to “work for you” by not paying for it all up front at the time you order.

A good example of this would be the financing of concentrators over 36 months. By doing so, you lock into a monthly payment that won’t change and allows you to preserve the cash you have in the bank or free it up for other short-term needs. Paying for your equipment as you use it helps generate income for you.

This concept also applies to your bank line of credit. If you have products that are strictly cash sales, such as canes or commodes you would utilize your cash on hand or bank line. Extended lease terms on retail products may solve a short-term problem but may cause problems down the road. It’s important to look at all your equipment and decide if it’s a long-term asset that generates revenue on a monthly basis or a cash-and-carry type of product.

Another way to look at your equipment is as if it were your employees: Do you pay your employees their salary up front each year, or do you spread salary payments out over time? This concept is not new to business owners, but it can be difficult to grasp when you are constantly juggling multiple tasks throughout the day.

Other considerations
Another advantage to having a bank and lease line of credit is increased purchasing power. If you experience growing pains when you land a new contract, or if you are a winning bidder in one of the 10 MSAs, you’ll need money to fund your company’s growth.

We are also seeing that some of the latest respiratory product innovations are more expensive and require a larger cash outlay. If your company does not have the necessary cash in the bank for such an outlay, your bank line can help pay for disposable products or retail products and the lease line will cover any equipment purchases you make. The last thing you need is to not be able to purchase equipment necessary to service a contract or your patient base.

Another thing to keep in mind is the potential “opportunity cost” by not having the funds available. Opportunity cost is the loss of potential gain from the best alternative to any choice. If you spend your cash on equipment purchases instead of using leasing, or you fail to have a bank line in place, it could cost you the chance to pursue that big contract or the chance to add another location. Part of remaining flexible is the ability to move in different directions based on the obstacles placed in front of you.

Financial flexibility also affords you the ability to take advantage of opportunities such as opening new locations, offering niche products or expanding geographically via acquisitions. All of these “opportunities” take money, and bank lines, combined with an equipment lease line, provide you the flexibility to move forward.

Plan wisely
Just having the funding sources available doesn’t guarantee success. You must analyze your business and make sure you are getting the most out of your cash, bank and lease line of credit.

Whether you’re looking to grow your business or want to avoid running into cash flow problems because of the aforementioned issues, you can utilize the cash you saved by leasing or the bank line you established to help carry you through. A bank line or lease might cost you a bit more in interest, but they are a strong combination if you are looking for financial flexibility in a market that is ever changing.

This article originally appeared in the March 2008 issue of HME Business.