Business Solutions

A Helping Hand

How providers can leverage financing to keep growing despite tough times, and how the financing landscape might be shifting.

Financial Helping HandEveryone needs help, especially HME providers. Today’s Medicare funding environment is rough to say the least. With competitive bidding, removal of the first-month purchase option, and crushing pre- and post-payment audits, providers are not only seeing their cash flow in fits and starts, but might have to completely reorganize how they run their businesses, as well. How can HMEs purchase inventory when they are seeing a complete upheaval in how that DME is funded? If cash flow is the name of the game, some providers are finding themselves asking, “who shut off the valve?”

Fortunately, there is help in the form of financing. Providers have access to various options for borrowing the capital necessary to keep pace with payments, which the funding starts rolling back into the business.


Financing plays a critical role in the management of both small- and large-sized businesses. Simply put, a smart business planner tries to spend other people’s money instead of the company’s capital resources. So, if a provider knows that it will get funding for a certain amount, it will try to borrow money or undertake lease financing under agreeable terms over that funding period in order to cover the purchase of the DME. They can make a payment fit into their budget better than they can make a large cash outlay.

“It’s all about cash flow in this space,” says Kurt Schmitz vice president and sales manager for the Health Care division of VGM Financial Services, which provides financing to HME providers. In fact, some segments of the industry, such as CPAP and oxygen providers have already hit a stride with financing. Given that their funding is spread over a given span of time, such as 36 months for oxygen equipment, both financing and funding can be predictable from an accounting standpoint. This is the ideal arrangement for financing.

“It’s already laid out for how the cash flow would go for them,” he says. “… For CPAP and oxygen providers, since they’ve had the reimbursement set up the way it has been for so many years there’s been no change to it. Yes, the dollar amounts have changed, but how it comes to them doesn’t change, so I think they’ve had a little more time to get set up with financing.”

And, with time, some businesses can use financing to grow their businesses to the point where they have enough incoming cash flow to not rely as heavily on financing as they once did.

“We have seen a lot of customers that we have financed with over the last few years that get to the point where they don’t need financing any more because they have used it to get to a point where they have the cash saved up to the point where they can make cash purchases rather than finance them,” Schmitz says. “That’s great for them. That’s what financing is for — to help them manage their cash flow.”


A primary source of financing in the HME industry comes from the very vendors that manufacture the equipment HME’s provide to their patients. These manufacturers are a solid option because they offer very attractive terms to their provider customers to finance the purchase of the products they make.

Two examples of manufacturers that offer financing to providers are Invacare Corp. and Pride Mobility Products. Notably, Invacare is the only manufacturer in the industry that retains its own captive financing company, Invacare Credit Corp., to offer HMEs easy-to-obtain financing for equipment purchases.

“[Financing] is important, I think, in this industry, because of the fact that our customers are not able to get paid for the product that they put out to a patient, given the cash flows that are associated with Medicare and private pay insurance and Medicaid, etc.,” says Bill Corcoran, vice president of financial services for Invacare. “So it helps our customers match cash flows more appropriately, and helps to provide them with the capital to grow their businesses properly.”

Pride Mobility also offers inventory financing with attractive terms, as well as financial consulting services to help providers plan their businesses and use that financing to grow it. To apply for Pride’s inventory financing, qualifying Pride dealers start off with an initial credit application. Then Pride works with the provider to structure the financing, says Laura Tavella, general manager of credit and billing for Pride.

“The terms of the financing are very flexible,” she says. “We usually create solutions that are tailor-made to fit each and every providers for their cash challenges.”

But vendor-sourced inventory financing is only one option. The other option is to finance inventory through a third party, such as a commercial lender or similar source. One industry grown-source is the aforementioned VGM Financial Services, which is very familiar with the financing needs of the HMEs.

“We typically try and match the financing we offer a customer with the type of reimbursement that goes along with that product,” Schmitz says. “In other words, for a concentrator, if they are getting reimbursed with the cap at 36 months, we’ll go out to 36 months on those. But say for a CPAP, where providers are getting reimbursed at 13 months, we’ll probably do a 12- or 15-month transaction with them.”

Moreover, because it is industry based, VGM Financial is aware of industry changes and can adapt to them. For instance, due to the removal of the firstmonth purchase option, VGM Financial is currently creating a financing product that will reimburse providers based on something like a 15-month lease.

Another option when searching for, selecting and securing financing is through brokering, in which the provider works with a third-party that has relationships with various sources of financing. An example of this would be Charter Capital, which offers wholesale credit brokering services to MED Group members and other HMEs in the industry. Charter Capital works with roughly 25 various lenders, inventors and other sources of funding, and then works with the provider to find the right source of funding, says Rick Wilbur, managing partner for Charter Capital. Charter looks at the HME’s business history, and other factors to come up with right financing for that provider’s financial position.

“We really have two functions,” Wilbur says. “First, we’re an unpaid consultant. We will look at their financial condition and develop the trends of their business and compare that to what’s available in the marketplace in terms of financing. We’ll counsel them and give them options, and they make their selection. Then we access our network of financing partners and try to get them the financing that they have chosen.”


So, where does a provider that has never financed its inventory get started? What do they need from a business planning perspective and what is the process for obtaining financing.

To start, a provider needs to form a relationship with a bank before it borrows money from a business financing company, in order to keep itself covered.

“I think first and foremost, anyone starting out in this industry needs to have the backing of a bank,” Schmitz says. “They need to have a line of credit set up with a bank that they can dovetail in with financing through a leasing company such as ourselves. It’s very important that they have multiple sources of cash so that when cash flow gets a little tight and the provider needs to make payments, it can use that line of credit to get that extra cash to make it through the month.”

Remember, businesses have credit ratings just like individuals do. Dun& Bradstreet generates credit reports and tracks how businesses pay their bills, and B2B financing firms rely heavily on D&B reports when reviewing credit applications. Also, financing companies work closely with PayNet, a credit scoring and reporting organization specifically geared for small business lending.

Likewise, when first applying, lenders will often look at the personal credit and financial situation of the provider business’s owners.

“When a new provider comes in, we have them fill out an application that has their bank reference, as well as their personal social security number,” Schmitz says. “In this market space a lot of providers are ‘mom and pops’ — the business is essentially them. Personal credit is a pretty good indicator of how someone is going to pay for their business, too.”

So, start small in the beginning. This can help generate a good credit rating. Plus, learning to wield finance effectively can take some time, and the last thing a provider wants to do is get over eager and over extend itself.

“If you need $25,000, don’t ask for $100,000 because you know you’re going to need $100,000 a year or two from now,” Schmitz says. “Start with a few small leases, get a pay history established with the finance company, so that as your needs grow, you’re able to grow with that finance company.”

Equally important, manage the finance and ensure it keeps pace with your growth. Believe it or not, you can grow yourself out of business. If a financing company will only give you a certain amount of money, and if that amount of money is out of step with what you need, you’ll be in a position where you can’t source capital.

“Providers need to keep their financials up to date and have regular conversations with their bank and leasing company,” Schmitz says. “They need to be as transparent as possible when it comes to how they are running their business.” Invacare’s Corcoran echoes this saying that providers need to be willing to share detailed financial information with their lending sources, such as two years of profit and loss statements, balance sheets and cash flow analyses. This is critical in building credibility lending sources and demonstrating financial viability to them.

“I also think it’s important that providers really understand that it is important that they’re able to a business plan together,” Corcoran explains. “And share those plans with their creditors, as well, so that they can get their creditor — whether it’s a bank or lending source like ourselves — comfortable with not only where the business has come from, but where are they going and what are their plans to improve their profitability and improve their cash flow.”


Of course, the HME business is mercurial, especially given the current funding environment. Maybe a provider has been cut out of its core business because of competitive bidding. Maybe a provider lost a couple key referral partners to a competitor. Maybe it has suffered an avalanche of audits and its cash flow has come to a complete halt. Whatever the reason, the provider has lost significant income and can’t keep pace. What does it do?

“This is a perfect example of what I said earlier that providers need to be transparent when working with their bank or their financing company,” Schmitz says. “If the provider is up front with us right away, we’re able to help them out.”

“In situations where the provider runs into cash flow issues one of the first things they need to do is pick up the phone and start talking to the people they pay each month,” he explains. “There have been times and opportunities where we have been able to restructure their lease payments.”

For example, a provider could be in a 36-month contract and in 12 months into it the provider winds up with some cash flow issues. By contacting the financing company, the lender can look at where those cash flow issues are and come up with a fix. So, if the provider was simply getting audited and expects to get paid in 60 days, the financing company could put a 60-day “skip” in the lease to extend it a little longer and give the provider’s cash flow the necessary time to keep pace with the lease payments.


Interestingly, while one would conclude that the fear, uncertainty and doubt surrounding much of the Medicare funding in the HME industry would instantly spark increased interest in financing, the volume of financing could actually remain fl at thanks to those fears.

“It’s been a mixed bag,” he says. “We’re seeing customers that might have not financed in the past, but we’ve also seen the market as a little soft because people who might have been financing with us a lot in the past haven’t been doing as much. … A lot of the providers have been trying to keep their inventory levels down, so the average deal size has gone down.

“So, I guess you could say we’re probably fl at in respect to the fact that we’re seeing new customers come in that need or want financing, but the current customers aren’t doing as much because they are trying to keep their inventory levels down,” he concludes. “Inventory sitting in your warehouse isn’t generating any revenue for you.”

Will the coming year drive demand for HME financing, especially with the implementation of competitive bidding Round One on Jan. 1, 2011?

“Providers are going to find themselves using financing solutions as they may have never before,” says Ted Raquet, senior vice president of domestic sales for Pride Mobility. “Any time that there are changes that reduce or delay the reimbursement cycle to DME inventory, that produces a greater demand for financing solutions, not just for inventory, but for working capital as well.”

“My general sense is that our customers’ need for financing is going to increase over the next several years, because matching cash flows in this kind of environment of reduced reimbursement makes it particularly important,” says Invacare’s Corcoran.

That said, despite an increased need, 2011 might still see a leveling when it comes to providers affected by competitive bidding. Winners in the nine competitive bid areas might find themselves in a precarious position in terms of having to very quickly satisfy stiff increases in volume, but bid losers could start standing pat or ratcheting down on their financing.

“I think some of those providers that won the bids might be picking up some business that they won’t be able have the money available to service the contract they now have,” Schmitz says. “With that being said, I think you’ll see a slow-down in the providers that didn’t win the contracts, or that are grandfathered in, or just servicing the contracts they already have. I think we’ll probably see a flattening again.”

One coming change in Medicare funding that could spark certain providers to increase their reliance on financing is the removal of the first-month purchase option. Despite the preposterousness of having to rent mobility devices to patients with lifelong conditions, mobility providers will need to rethink how they operate their businesses.

“It would seem to me that on the consumer power side of the house, where you have a complete change in the reimbursement with the purchase option elimination, that clearly our provider customers are going to want to do everything possible to match those cash flows correctly,” Corcoran says. “Since they’re not going to be paid in full.”

“That’s going to be difficult for that group to absorb a hit like that to their cash flow,” Schmitz agrees. “They are going to need to have a reserve available to make equipment purchases, because they are going to have a disruption in their cash flow and more importantly they are going to need to know what their expenses are and to level that off. And the best way to do that is finance something so you’re set in for a fixed lease payment every month.”


There are other changes in provider financing that are happening outside of the funding space. This can be seen in the supply side of provider financing. While providers’ interest in financing might be increasing, interest on the part of lenders might be dropping off — especially among commercial lenders.

“For the most part, the commercial lenders for these sizes of transactions [for the HME industry] are really not familiar with the industry,” Charter Capital’s Wilbur explains. “So they’re using a generic yardstick to measure the DME industry, and compared to the traditional ways of the financing, the DME industry doesn’t stack up.”

There are a couple strong reasons for this disparity between financing in HME versus other industries, Wilbur says. First, the collateral has virtually no value in the case of repossession. From a security standpoint, the lenders are seeing this as making an unsecured loan, Wilbur explains. Also, the financing terms are very short in the DME space. “That doesn’t give the lender enough chance to make the kind of money they need to make for the kind of funds they are putting out,” he says. “They have a certain cost of ‘booking the deal’ and they need a profit margin in addition to that.”

Without enough margin, lenders don’t have good reasons to finance provider inventory. And this a problem that is contributed in part by unrealistic expectations with in the HME industry fueled by very friendly terms available from manufacturers, Wilbur says.

“When you get into the real world, the commercial finance world, the banks aren’t going to do that. So the rates the banks charge will appear to be a lot higher than what some of the manufacturers have charged,” he continues. “What all of this has done, has created a sour taste with most of the commercial lenders. They look at the home healthcare industry as a low-profit, high-risk business that they don’t understand.”


Another factor that is scaring away lenders? Fraud. Case in point: Allied Healthcare Services. Allied’s founder and president, Charles Schwartz, was recently arrested by the FBI for allegedly fraudulently obtaining more than $87 million in loans for phony DME purchases. According to the charges, starting in 2002 Schwartz set up a fake “supplier” that invoiced his business for DME purchases, and then Allied would secure loans for the lease agreements on the mythical “purchases.” More than 100 lenders were left holding the bag.

“Those lending institutions are going to frown upon financing the home healthcare industry more-so than they were before,” Wilbur says. “That’s just the way the banker mentality is — if you make a mistake in a particular industry, the best way to not repeat that mistake is to just not do business with them.”

These instances of fraud aren’t exactly isolated, and when compounded with the dramatic upheaval in the HME spaces that has forced some providers to go out of business (and thusly default on their loans), the situation has made securing financing that much harder for providers, especially in a “formula lending” environment.

When reviewing whether it wants to lend money in an industry, financing firms will take information from various sources to profile various industries. The lender will then make conclusions about whether a company is “okay” to lend to, based on its industry’s delinquency percentage.

“In home health, the delinquency is at 35 percent,” he notes. “So, when these companies write their formulas [to decide on whether to lend to a provider], they put in a much lower value, and in some cases a negative value, for any business in the home healthcare industry. So you have to be extraordinary in other areas to garner an approval.”


So what’s an HME to do? If a provider needs financing as a business tool, but is seeing a winnowing down in the population of available lenders, how can it gain access to that financing? For starters, Wilbur advises that providers need to better manage their expectations and prepare to pay higher rates.

“There is a perception in the industry that providers are entitled to very low rates,” he says. “They’re not entitled to anything more than any other industry, and in fact, historically, they should be charged the higher rate because the deals are riskier.”

Also, Wilbur says that many providers should avoid using accounting techniques that might make sense for the HME space, but not for lenders. Instead, Wilbur advises providers to hire an accountant to recast their cash flow before meeting with lenders to secure financing, especially ones that aren’t used to financing in the HME industry.

“If I were a home health providers … I would write a paper that I would keep in my files and update with each financial statement explaining what accounting treatment is; why we’ve done it that way; what the benefits are; and what the financial statements of the company would look like if they accounted for it on a more traditional basis,” Wilbur explains. “DMEs have to become familiar with what is required in the commercial market.”

And meeting the tougher standards and expectations of the commercial lending industry could foster an increased willingness to lend to the HME industry, which can in turn help providers even more in the future. “We need to bring the two together so that providers have a more pragmatic understanding of what’s available, and lenders have a more realistic view of what the providers’ businesses really are,” Wilbur says. “And I think that will create more funding into the industry.”

This article originally appeared in the December 2010 issue of HME Business.

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