Traditional Banks for Health System Capital: Pros and Cons 

traditional bank

As fallout from the impacts of Covid-19 continues to change the financial environment for both healthcare providers and consumers, health systems have been forced to rethink their options when the need for capital arises. Issuing bonds, working with a real estate developer, and pursuing public financing through PFAs are all options available to health systems.  

An additional option for raising capital is to turn to traditional banks. While this can be a viable option, there are several important considerations that health systems should keep in mind when considering this route. 

What Kind of Banks Lend to Health Systems?  

Many large commercial banks have become conservative with their lending practices while interest rates continue to climb. However, local or regional banks may be a viable alternative for health systems looking to borrow capital. Unlike larger banks that may have a more rigid lending process and stricter underwriting requirements, smaller banks can often make lending decisions based on factors beyond just a credit score or financial statements. They may take into account the borrower’s character, reputation, and potential for success. 

Smaller banks may also have more flexibility in loan terms, such as repayment schedules and interest rates. This is because smaller banks can make lending decisions more quickly and are often more willing to work with borrowers to find a loan structure that works for both parties. 

Additionally, smaller banks may have more discretion in the amount of capital they can lend. They may be able to lend more or less based on their current financial position, the borrower’s needs, and the overall economic condition of the local market. 

What Are the Risks Associated with Borrowing from a Traditional Bank?  

The first consideration is the potential cost of borrowing from a traditional bank. Banks typically charge interest on loans, which can be a significant expense for health systems. Federal interest rates have continued to climb, which has impacted the cost of borrowing for health systems with poor credit ratings in particular.  Additionally, banks may require collateral or other forms of security, which can further increase the cost of borrowing.  

Another consideration is the time and effort required to secure a loan from a traditional bank. Banks typically have a rigorous underwriting process that can take several weeks or even months to complete. Health systems may need to provide detailed financial statements, business plans, and other documentation to demonstrate their creditworthiness.  

When considering using a traditional bank to raise capital, health systems should also be aware of the potential risks involved. For example, banks may require that the health system maintain a certain level of financial performance or meet certain milestones in order to remain in good standing. Failure to meet these requirements could result in default on the loan or other negative consequences. 

Before borrowing from financial institutions, it is important to take into consideration your own credit standing from a lender’s perspective. If you have fears that your credit rating might translate into unfavorable terms, it might be more cost-effective to use other third-party capital such as a developer.  

Benefits of Borrowing Capital from Banks  

Despite these challenges, there are several potential benefits to using a traditional bank to raise capital. For one, banks can provide larger amounts of capital than other sources of funding, such as individual investors or crowdfunding platforms. This allows health systems to quickly finance strategic initiatives or capital projects to seize growth opportunities and stay competitive. 

Traditional banks can offer flexible repayment terms, allowing health systems to tailor the loan structure to their specific needs. This flexibility can help health systems better manage their cash flow and budget. Although the lending environment has changed throughout the Covid-19 pandemic, there is a long track-record of health systems and banks working hand in hand to accomplish strategic goals.  

Another potential benefit of working with a traditional bank is the opportunity to build a relationship with the bank over time. Health systems that establish a positive relationship with a bank can benefit from future borrowing opportunities, as well as potential access to other financial services offered by the bank. 

Key Takeaways 

In conclusion, using a traditional bank to raise capital can be a viable option for health systems in need of funding. However, it is important to carefully weigh the potential benefits and risks before pursuing this route. By considering the cost of borrowing, the time and effort required to secure a loan, and the potential benefits and risks, health systems can make an informed decision about whether to pursue traditional bank financing. 

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Chris White

Business Development Manager

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