Replenishing Your Working Capital to Reopen after COVID-19

As the stay-at-home orders are gradually pulled back you are likely trying to determine what your new normal looks like post-COVID-19. Many things are likely on your mind, but replenishing your working capital should be at the top of your list. Let’s take a closer look.

What is your working capital? Why is replenishing your working capital so important?

Working capital, the difference between current assets and liabilities, is what you will need to ramp your practice back up.  Undoubtedly, most of you have lost money during this slow-down, which means you have also lost working capital.  Some of you may have quickly furloughed most of your employees to limit some of your financial losses.  Still, you likely lost money and your current assets (cash balances, accounts receivable, and inventory) are likely much less than your normal business—and may continue to decrease until sometime after your business picks back up.  Even if payments from your accounts receivable from Medicare, commercial payors, and patients have held up for the time being, you’re likely now well more than a month into the slow-down.  This means future cash flow may likely turn into a trickle until your accounts receivable balances build back up and you find your practice reestablishing a normal cash cycle. This may also mean that your practice may be approaching a cash flow pinch point, as you still need the working capital to meet short-term obligations like rent (or mortgage) payments, standard accounts payable, payroll, and more. Let’s look at some strategies you might consider as you look at replenishing your working capital.

CARES Act

While the funding from the original Coronavirus Aid, Relief, and Economic Security (CARES) Act has run out, within the last week the Federal government passed another round of stimulus for small businesses—which could offer sources of additional working capital for your practice. Furthermore, the Department of Health and Human Services announced additional allocations of $100 billion specifically for healthcare providers just last week—April 22, 2020. Let’s look at those program pieces for which your practice might have qualified from the CARES Act::

1. Paycheck Protection Program Loans (PPP): While the PPP loans mandated that 75% of the loan proceeds must be used for payroll, benefits, and payroll taxes, the other 25% of the loan could be used for other business expenses such as rent or utilities. A few caveats apply to qualify:  Your practice must demonstrate harm from the COVID-19 pandemic and your practice must have 500 or fewer employees. Provided you keep your employees on payroll or rehire them by June 30, 2020, however, as much as all of the original loans could be forgiven. You’ll need to work with an SBA-certified lender to apply.
2. Payroll Tax. A provision in the CARES Act allows your practice to defer payment of your payroll taxes for the period March 27-December 31, 2020.  Half of the deferred payments must be paid by December 31, 2021, and the other half must be paid by December 31, 2022.
3. Medicare Advance Payments. The Center for Medicare and Medicaid Services (CMS) is allowing accelerated payments to practices that submit requests to their Medicare Administrative Contractor and meet requirements, allowing for requests of up to 100% of their Medicare payments for the previous three months, with repayment of the advance required beginning 120 days after the advance was made. This may be a short-term solution for some practices.
4. Provider Relief Fund. The CMS began distributing grant checks to eligible providers April 10, according to their share of the $30 billion Provider Relief Fund based on 2019 Medicare FFS payments. These grant payments are a one-time payment and do not need to be repaid. If you believe your dermatology practice was eligible, but have not seen payment, it may be that there is not adequate cost report data on file with the Department of Health and Human Services; as they note on their website “Providers without adequate cost report data on file will need to submit their revenue information to a portal.” That portal (which may also create access for additional general distribution funds) is available here. Please note, however, that providers who receive their money automatically will still need to submit their revenue information so that it can be verified.
5. Emergency Economic Injury Disaster Loans (EIDL). Utilizing the same two criteria as the PPP loans, the EIDL allowed for an immediate emergency infusion to your practice based on a formula of the number of employees at your practice times $1,000. Assuming your practice qualifies, you can apply for a loan of up to $2 million; while loans below $25,000 require no collateral, loans over $200,000 require a personal guarantee. The second round of EIDL funding has become available—and is not likely to last long—so consider applying as quickly as possible, as the additional $60 billion in funding will likely go quickly. You can see more on the SBA site here.

Reduce or eliminate partner draws

Given that partner draws may be one of your dermatology practice’s largest uses of working capital, reducing or eliminating partner draws or payments can substantially reduce capital losses and give your practice a bit more breathing room. This, of course, requires partners to consent to limited draws for a time, but given that it may be one of the best ways to ensure the practice remains viable, it may be well worth consideration. Most partners will likely be willing to make at least some sacrifices to keep the business afloat in these troubled times, especially if everyone is of the same understanding that this is a short-term sacrifice for the long-term good of the business.

Lease forgiveness or abatement

After partner draws and payroll (and related expenses), lease payments are often one of the biggest expenses for a practice. Given that everyone is struggling in this current economic climate, you may be able to successfully approach your landlord and either get temporary lease forgiveness or an abatement. One approach may be to pitch a lease extension, which may prove a win-win for you and your landlord, especially if you have historically been a stable and successful tenant. Additionally, provided you make the case delicately, relying on your history as a great tenant (especially if you have historically paid early or on time) and the difficulty your landlord might have in finding another tenant may work in your favor. You may also wish to tread delicately, you probably don’t want to sour your relationship with your landlord moving forward. It is our experience, however, that straightforward honesty can often go a long way.

Other cash or credit infusions to replenish your working capital

Finally, looking at other cash or credit infusions may help your practice extend your working capital, buying you a bit more breathing room. Making a capital call from partners, for instance, can offer an immediate injection of working capital, provided partners have the personal savings to do so. Similarly, your practices’ partners may choose to secure a line of credit from a commercial lender backed by either the assets of the practice or a personal guarantee from one or more partners. Keep in mind that many local credit unions may be looking for ways to support their local community. For example, getting a reasonable loan may be easier right than you might think, especially as it may both help keep you afloat and prove a good return on investment for the lender.

Need help replenishing your working capital to reopen or ramp up your dermatology practice? Let one of our experts help.

Update 6/21: Best 8 Financial Tools to Combat COVID-19