receivable, inventory, machinery and
equipment (M&E), and real estate.
Accounts Receivable. The structure
of an asset-based lending facility
depends largely on the type of assets
a provider carries on its balance sheet.
The most basic asset-based loan is
structured as a revolving line of credit
secured by accounts receivable.
Generally speaking, any company that
provides health care service and bills a
governmental entity or an insurance
company for the provision of those
services might qualify for an asset-based loan. Health care companies
that use this type of loan are typically
service providers, such as home
health, skilled nursing, rehabilitation
therapy, behavioral health, and hospice
providers, as well as physician groups,
diagnostic labs, specialty pharmacy, and
dental practice management firms.
Asset quantity can be evaluated
by determining how much of any
particular asset can be pledged
as collateral and how reliable and
quantifiable its value is. Asset/
collateral quality measures are
slightly more obtuse. However, the
primary determinants of collateral
quality are how quickly an asset
can be turned into cash and what
other variables influence how cash
is received upon an asset sale.
Lenders typically will lend up to 85
percent (the advance rate) against
the net amount of eligible accounts
receivable, less contractual adjustments.
Eligible accounts receivable includes
amounts due and payable from
Medicare, Medicaid, and commercial
insurance companies. Excluded
collateral, commonly called ineligibles,
typically includes the following:
much a provider can borrow, given the
amount of eligible collateral and the
established advance rate. For example,
supplies, or general supplies, such
as bandages or surgical gloves.
than the standard number of
days from the date of service,
which varies by sector.
All such products may qualify as eligible
inventory collateral and therefore
be included in the borrowing base.
Advances against the net orderly
liquidation value (NOLV) of inventory
ranges from 50 percent to 75 percent,
depending on the type of inventory and
the ease with which it can be sold. The
more commodities-like a product is,
the higher the loan value that portion
of eligible collateral can achieve.
due directly from the patient).
claims, which are generally
under a letter of protection
(LOP) from an attorney.
Borrowers are also required to roll
the collateral forward each time they
wish to borrow funds under the line of
credit. Rolling the collateral involves a
simple calculation that adds beginning
collateral and new sales/claims and
subtracts collections to arrive at a new,
more current collateral amount. Funds
may be requested on a daily basis, but
generally follow a weekly or biweekly
pattern, depending on the individual
cash-flow needs of the business.
which payment of receivables
is contingent on the outcome
of a court proceeding.
Reporting required by asset-based
lenders varies, but generally includes
periodic accounts receivable aging
reports categorized by aging bucket
(e.g., one to 30 days, 31-60 days, 61-90
days, etc.) and by payer/financial class.
Aging categories are used to calculate
a borrowing base that outlines how
One thing to keep in mind when seeking
to pledge inventory as eligible collateral
to a lender is that inventory loans can
be challenging. For instance, some
inventory can only be sold by a licensed
provider, while some may have a specific
shelf life. Other types of inventory may
be subject to customer rebates that can
offset or reduce value. Some inventory
may also be protected by intellectual
property rights or royalty streams, which
can create unique obstacles that become
magnified should the business fail and
a distressed sale or liquidation ensue.
Inventory. In some health care
subsectors, companies maintain high
enough levels of inventory to warrant its
consideration as eligible collateral under
an asset-based credit facility. Examples
include pharmaceutical companies with
generic and other prescription drugs
and mail order items; medical device
manufacturers that produce items such
as hip and knee implants, insulin pumps,
or pacemakers; and disposable medical
product manufacturers and distributors
that provide items such as incontinence
and infusion and hypodermic
Another consideration for lenders is the
location of the inventory. Is it centrally
located? Can the lender gain access
rights to the building or warehouse