Stronger Financial Statements Earn Better Financing Options

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Obtaining the most favorable financing depends on having the kinds of financial statements that lenders want to see. Before seeking funding for a de novo build, an upgrade to an existing imaging center, or new modality purchases, it is important to understand the commonly used types of financial statements, the kinds of financing typically considered by imaging centers and how they affect financial statements, and the key factors that impress lenders enough to make them offer the best financing options.

Financial Statements

The balance sheet, the profit-and-loss statement, and the statement of cash flow are the common financial statements expected by lenders. Taken together, they give the lender an overview of the organization’s strengths, weaknesses, and probable ability to repay a loan. Obtaining financing depends on presenting convincing financial statements, so great care should be taken to ensure their accuracy.

The balance sheet constitutes a snapshot of the center at a fixed point in time (Figure 1). It indicates the financial strength of the organization and outlines its equity, assets, and liability. On the balance sheet, total assets will be divided into cash, fixed assets, and other assets. Total liabilities will include accounts payable, accruals, lines of credit, and long-term debits. Total equity includes retained and current earnings.

Instead of covering a fixed time point, the profit-and-loss statement (Figure 2) covers a given period of time. It gives the lender an overview of the center’s profitability and includes revenues and expenses.

The statement of cash flow likewise covers a fixed time period, and it gives the lender an idea of the center’s ability to generate positive cash flows. This statement incorporates a profit-and-loss statement, but this version is adjusted for noncash components.

Once financial statements have been generated, lenders will apply seven ratios (Figure 3)to their content to evaluate the organization’s financial prospects. These ratios tell the lender whether the center has too much liability for its currents assets, whether it is likely to be able to make payments on future debt (given its current obligations), and whether any problems with day-to-day cash flow might impair its ability to remain a going concern.

imageFigure 1.

The ratio analysis applied to a potential borrower will probably include liquidity/solvency ratios (current assets to current liabilities and current liabilities to net worth); debt-management ratios (total debt to total assets, total liabilities to net worth, and earnings before interest and taxes to interest expense); and profitability (net income to net revenue and net income to average total assets).

Asset Financing

Because it may have significant effects on the practice’s financial status, both immediately and over the longer term, the type of financing that the center will seek should be considered carefully. In particular, the effect that today’s financing choices will have on the appearance of the future balance sheet should be remembered, because that balance sheet, in turn, will affect the kinds (and terms) of financing offered by lenders in the future.

Asset-based financing can have varying effects on a financial statement, based on the type of loan involved. For example, factoring (borrowing against the future value of assets) does not lever up the balance sheet by adding debt, but leasing may, depending on the kind of lease chosen. A capital lease appears on the balance sheet (but the leased equipment is also treated as an asset); an operating lease is not shown on the balance sheet.

imageFigure 2.

Tangible or intangible assets may be used as security in asset-based financing. In essence, the organization uses what it can reasonably be expected to have at a future date to secure the cash that it needs now, through factoring or leasing. These arrangements have short-to-medium term lengths, since long-term financing would require a better prediction of future value than can be made reliably, in most cases.

Factoring can be based on accounts receivable or on future credit-card receipts. In either case, the lender offers cash today in return for a percentage of the center’s future income. Accounts-receivable factoring is based on the known value of current receivables and is collected over the term of the loan, which generally lasts less than a year. The interest rate is often high, in the mid teens to low 20s.