Protect Your Accounts Receivable
There are various ways to protect your medical practice’s A/R. By far the best option, however, is the Accounts Receivable (A/R) Leveraging Plan, which helps protect your A/R from creditors and can also turn them into a retirement benefit.
The A/R Leveraging Plan involves using a medical office’s A/R balance as the primary collateral for a bank loan. Depending on your lender, the loan will be equal to the revolving A/R balance generally ranging anywhere from 30 to 120 days. The A/R balance, by the way, is the “real” value of the A/R ─ not the inflated amount your medical practice may have on the books for what is billed.
Since the bank will have a primary lien against the receivables’ balance, this “asset protects” the balance from the claims of other creditors.
Once the bank loan is made, the loan proceeds can be invested for the purpose of providing the physician with death benefit protection and, potentially, a source of supplemental retirement income.
How well the A/R Leveraging Plan work for you depends on the following factors:
1) Interest Rates – The A/R Leveraging Plan requires a loan for upwards of 20 years. The lower the interest rates and the longer loan rate is fixed, the better the plan will work.
2 Investment Returns – If the investments do not perform well (7% or better), the likelihood of the A/R Leveraging Plan working better than post- tax investing is reduced (unless interest rates on the loan stay abnormally low).
However, if the interest rates are moderate throughout the life of the Plan and if the return in the investment is similar to what the S&P 500 has done over the last 30 years, then the A/R Leveraging Plan, when set up correctly, can be a nice and economically effective way to protect your medical office’s A/R.
The Steps for Doing A/R Leveraging Correctly:
1) The bank lends money directly to you, the physician. The borrowed money is equal to the amount of current “real” A/R on the books of the medical practice.
2) You purchase a single premium immediate annuity (SPIA) with the borrowed money.
3) The SPIA pays income for 3-5 years, and that money is used to fund a life insurance policy that is supposed to act as a long-term investment for the physician.
4) The SIPA and life insurance policy are pledged as secondary collateral on the loan.
5) The medical practice’s A/R is pledged as the primary collateral for the loan.
That is as complicated as it gets when doing A/R leveraging the correct way. Because the A/R is pledged as the primary collateral for the loan, it is asset protected as long as the loan stays in place.
Is the A/R Leveraging Plan right for you?
If you are worried about losing your A/R in a lawsuit to creditors, then the A/R Leveraging Plan is a nice option to consider as long as you understand how it works.
If done correctly, the A/R Leveraging Plan should work out neutral or positively from a financial perspective. Unless interest rates go through the roof (10%+), the A/R Leveraging Plan should work well for you as an asset protection tool and at least neutral with the possibility of positive financial returns for the client in retirement.
Since you may also be able to lower your malpractice insurance coverage and save money on premiums, those savings will further help improve the financial viability of the A/R Leveraging Plan.
In the end it’s up to you: if asset protecting your A/R will help you sleep at night and make your life less stressful, the A/R Leveraging Plan will be an option you should seriously consider and discuss with one of our expert asset protection advisors in your area.
