Medical practices can be lucratively profitable businesses. But they are often subject to irregular financial flows, which may put their survival at risk. In such a situation, medical practices often use lines of credit from a financial institution, typically banks, to facilitate day to day running of their practices. It is a strategic business tool that helps them bridge unexpected shortfalls in the cashflow. So, every time things get a little behind, such as in the case of a delayed reimbursement, you can seek financial assistance by drawing a line of credit. It adds a comfortable cushion for you to fall back upon in difficult times.

Hiring a temporary replacement, delayed reimbursements, refurnishing damaged equipment, and a natural calamity are all examples of situations where a medical practice may deem it appropriate to draw a line of credit. So, instead of shutting down the practice temporarily due to financial difficulties, it is better to seek financial assistance through this strategy.

A line of credit essentially allows the borrowers to draw money from financial institutes in return for a fixed amount of interest payable every month. This interest is only owed on the principal amount borrowed and not on the interest. However, the borrowers must repay the principal within the agreed time, until which they continue to pay the interest. The rate of interest typically ranges between 10 percent and 27 percent and is tied to the U.S. prime interest rate of London Interbank Offered Rate (LIBOR).

The amount of credit line offered is based on a ratio that factors in the requirements and size of the practice and the accounts receivables in case of established practices.

The process of acquiring a line of credit is pretty straightforward. You apply with the bank, discuss your practice’s needs and furnish the required documents to the lending firm – typically about three year’s financial status. This includes three years’ worth of tax returns, both personal and business, and three years of financial statements (income statements and balance sheet). You must demonstrate a track record of solid financial performance with documented accounting evidence to seek the required credit. You must also be able to explain why you need the line of credit. The bank will then review your documents to determine the possible cashflow gaps and the amount of credit to be allowed.

In the case of new practices, the bank will want to review the business plan, revenue projections for the next two to three years, as well as the personal financial statement of the physician.

Holding a line of credit out of its full term can be expensive. Hence, it is advised to repay the acquired loan within the stipulated time in the contract to avoid any inconvenience.