Bare Doctor Blog: Lubell & Rosen Law Firm

In private practice, your accounts receivable may be the largest single asset of your business. Unless your practice owns its own building or a similar investment, the money patients owe you for the services you’ve provided will be significant—and this significance makes accounts receivable one of the first targets for creditors. Following the logic of taking out loans on your business, specifically encumbering your accounts receivable can help you protect assets and maintain cash flow so that your business can stay afloat.

Creditors have some latitude regarding accounts receivable—they can garnish the money before it’s paid or wait until the cash hits the bank and then seize it. Typical judgments don’t make distinctions about the date of deposits. If the money is in the account, it doesn’t matter when it was deposited; the creditor is going to get enough money to satisfy the judgment. If satisfying the judgment means forfeiting all the money in the account, that’s what’s going to happen.

Physicians can protect accounts receivable by taking out loans against these assets. This protection can be taken a step further by factoring. Factoring is not merely using the accounts as collateral; it is assigning the receivable “paper” to another company who will collect the money from the customers. In this case, the business will pledge the accounts receivable to an institutional investor at a total value less than the face value of the receivables. The difference between the total of the accounts receivable and the amount of the loan proceeds is called the discount. The discount is a condition of the loan itself and acts as security for the lender in case creditors attempt to seize the money. It is through the discount that the lender makes its money.

It’s worth noting that the larger the amount of accounts receivable you have to offer, the more willing an institutional investor may be to cut you a deal on the discount. I’m not saying this is always the case, but you should explore this with the investor to save yourself money. As with all loans, lenders take into account the loan repayment schedule, overall security of the assets, future viability of a business, etc. Once the loan is issued, the lender’s secured position will take precedence over that of other potential creditors who may want the same accounts receivable. By working with an institutional investor/partner, you are adding another layer of shielding from creditors.