HME shares in credit pain

Friday, October 31, 2008

As with other industries, financing for home medical equipment companies is in a state of limbo amid the credit freeze gripping the U.S. economy.

“The credit crisis will probably affect the HME industry over the next year because the amount of credit that finance companies are willing to give is shrinking,” said Bill McMahon, account executive for Youngstown, Ohio-based Cailor Fleming Insurance. “I have not come across any clients yet who are having a tough time, but it is only a matter of time before they face a financial hurdle when it comes to obtaining a loan or a leasing agreement.”

Still, experts maintain that even if credit isn’t readily available at the moment, it doesn’t mean providers shouldn’t keep trying.

“The tightening of credit-while not helping the industry any-is not affecting health care any differently than the rest of the economy,” said Bently Goodwin, CEO and founder of Memphis, Tenn.-based RemitDATA. “Unless you go to your banker with a clear picture of the needs of the funds; realistic proforma financial statements that demonstrate the ability to repay the loan; and a clear, concise explanation of your business and the key drivers of it, you will be wasting your time.”

Strong company fundamentals and automation technology can be helpful in swinging a loan, but Goodwin says even that may not be enough in the current climate. The key, he says, is to demonstrate an ability to repay the amount of money requested.

The lower the risk a company can make itself out to be, the better the chance for the loan, agreed Lisa Bargmann, president and CEO of Akron, Ohio-based Homecare Collection Service.

“The companies that are seeking loans must prove they are stable and worthy of the funds,” she said. “Any provider that becomes more efficient and lean is definitely going to be more attractive to lenders.”

Despite the reluctance of banks to offer credit, HME financing and leasing companies are more knowledgeable about the industry and, therefore, more tolerant of challenges, said Patrick Sponsel, vice president of Glendale, Ariz.-based Sharpe Financial Network.

“The HME industry’s trade history has been a lot more forgiving than most,” he said. “Net 120 terms have historically been deemed acceptable by manufacturers’ credit departments.”

Providers have options besides loans, too. Companies like Boca Raton, Fla.-based Sun Capital buy third-party claims, advancing cash to the HME company. When the claim is paid in full, Sun reimburses the provider for the difference, minus a fee.

“This can be a valuable tool because it isn’t credit dependent,” said Mike Koslow, senior vice president for marketing and administration. “If the claim is paid within 30 days, they can get 97% or 98% of its value back.”

At the recent HME News Business Summit, Richard Glass, president of Tarpon Springs, Fla.-based Steven Richards & Associates, told attendees that providers have shifted away from bank lines of credit and equipment leases, and toward longer-term bank notes and private investors.

“Unless HME companies need financing to accommodate growth, they should probably be focused more on paying down their debts to better prepare themselves for the looming oxygen cap and 9.5% cut,” he said.