Behavioral health groups run a structural cash gap: payroll every two weeks, collections 20 to 90 days behind. Growth widens the gap, because every new clinician adds payroll months before their credentialed sessions produce cash. A working-capital line of credit is the standard tool. Many practices either do not have one, have one that is far too small, or lose access to it by tripping a covenant they did not understand.
What the lender is underwriting
A commercial banker wants to see that the practice generates cash reliably, that its receivables are real, that its owners are not extracting everything, and that management knows its numbers. Concretely: two to three years of accrual-basis financial statements, a current receivables aging with collection history by payer, a 13-week and 12-month cash forecast, payer concentration, clinician turnover, and the owners' personal financial statements and guarantees for smaller facilities. A practice on cash-basis books with an unreconciled receivables balance is a difficult credit; the same practice with a real close is a routine one.
Sizing the line
Size it to the receivables cycle and the growth plan, not to a round number. Peak working-capital need is roughly: (average daily net revenue × days in receivables) plus the cumulative pre-revenue cost of planned hires, less the cash the practice keeps on hand.
Worked example
A group with $3.4 million in annual net revenue ($9,300 a day), 44 days in receivables, plans to hire three clinicians over the next year with a combined pre-credentialing cost of about $85,000, and keeps a $120,000 operating balance.
| Component | Amount |
|---|---|
| Receivables carried (9,300 × 44) | $409,000 |
| Hiring gap (cumulative pre-revenue cost) | $85,000 |
| Seasonal trough (August/December session dip, from history) | $40,000 |
| Less operating cash retained | ($120,000) |
| Indicated line size | ~$415,000 |
| Rounded ask, with headroom | $450,000 |
Illustrative figures for a hypothetical practice; not a client's data.
A lender will typically advance 70 to 80 percent against eligible receivables (commercial and government claims under 90 days; patient balances and claims over 90 are usually excluded). The group's eligible receivables of roughly $350,000 support the ask. Had the group requested $150,000 "to be safe," it would have exhausted the line the first time two hires overlapped with a Medicaid payment delay.
Covenants that trip behavioral health practices
- Debt service coverage: earnings before interest, taxes, depreciation, and amortization divided by debt payments, tested quarterly. Owner distributions often reduce the numerator; a large distribution in a good quarter can breach the covenant.
- Minimum liquidity or current ratio: breached when receivables age past the eligible window.
- Borrowing base reporting: monthly receivables aging certified to the bank; late or inaccurate reporting is itself a default.
- Change-of-control and key-person clauses: a partner buy-in or the departure of the founder can trigger review.
- Restrictions on additional debt: an equipment lease or a second location's build-out financing may require consent.
Read every covenant with the CFO and counsel before signing, model them against the forecast, and build them into the monthly report so a breach is seen coming.
What we would do in the first 30 days
- Assemble the lender package: accrual statements, receivables aging with payer collection history, 13-week and 12-month forecasts, payer concentration, turnover data.
- Compute the line size from the receivables cycle, hiring plan, and seasonality.
- Identify eligible receivables under the likely borrowing-base definition.
- Approach two or three banks with the same package and compare rate, advance rate, covenants, and reporting burden — not just rate.
- Add covenant tests to the monthly management report from the day the facility closes.