Mark Farlin

Author: Mark Farlin
VP, Head of Healthcare & Infrastructure

The pandemic left many ASCs delaying growth and expansion plans while putting ownership earning priorities on the back burner. But in 2022, many look forward to again adding locations, expanding services, and returning to the compensation levels many ownership groups had long enjoyed.

Balancing the capital demands of the ASC growth wave with increasing appetites for dividend distribution has financial managers seeking new alternatives for capital investment.

“Our partners have made significant sacrifices over the past two years to keep our staff on board, and we need to get as close to normal as possible. Because of the major investments we plan to make, we will be relying on financing options more heavily than in the past. We generally price out three or more competitive offerings, including the manufacturer or vendor when they offer incentives, our usual banking partners, and third-party lenders that may have special programs available.”

Alfonso del Granado, ASC Executive
Becker’s ASC: Investments, upgrades & growth: One administrator’s plans for 2022

Seeking creative financing alternatives is one of the most effective actions financial leaders can take to ensure the strong cash positions that lead to maximum ownership earning potential while still preserving the investments in technology and equipment to power business evolution. Here are five tips to help ASC financial executives manage this delicate balance.

Act Quickly
With interest rates likely to rise several times through 2022, front-loading your capex spend this year may allow you to lock in historically low interest rates while preserving cash. And as supply chain problems continue to plague equipment and technology inventories, having capital partnerships firmly in place to act quickly when inventory becomes available is key.

Think Beyond Rate
Finance structure can often have a larger effect on cash flow than interest rates. While 100% financing, longer amortizations, residual-driven leasing, and balloon loans may have higher nominal interest rates, they can dramatically reduce the impact on cash flow and reserves ultimately required to maximize dividends.

Align Expenses to Revenues
Many ASCs are opening new revenue streams with new procedure offerings. Those procedures often require up-front investments in staff, facilities, equipment, and technology months before revenues start rolling in. To maximize short-term cash positions as new revenue streams unlock, consider a creative step-up payment structure that minimizes early payment obligation for equipment and technology and gradually ramps up later in the term to align with revenue generation.

Timing the expense/revenue match poorly can leave ASCs with a reduced ability to meet fiscal year-end compensation distribution maximums. The vision for the center’s service expansion and technological enhancements can lead to an unnecessary cash crunch until new procedure revenues hit, leaving less compensation available for ownership. Smart ASCs can use a step-up payment structure to invest in new technologies now while continuing to meet compensation requirements and debt demands as new revenues arrive.

Plan for the Solution Lifecycle
With technology driving an increasing pace of product evolution, staying on the cutting edge of care requires more frequent capital investment. But paying cash or using a bank revolver to fund equipment needs is less attractive in an environment where assets are increasingly short lived and growth demands compete with profit distribution requirements.

Financing can be a better alternative, provided ASCs take advantage of a finance structure that factors in the project’s life of the equipment. Rather than racing to own 100% of an asset that in 24 months will be valued at 20% or less of the purchase price, ASCs should consider a payment structure that aligns with the lifecycle of the asset. This approach typically supports greater ROI/A and easier cash control over the changing needs of the center by reducing large cash outlays.

Know Your Options
Medical equipment and technology finance specialists bring not only a unique understanding of the assets you need, but also your operational requirements as an ASC. These specialists can also reach further than the limitations of manufacturer offerings in that they can build customized solutions that are brand agnostic and offer financial flexibility that extends beyond traditional bank lending.