One of the most common ways to improve the cash flow of a nursing home is to ask vendors for 30-day payment terms. These terms give you one month to pay invoices and allow you to manage your cash flow more effectively. This strategy can help skilled nursing facilities that have cash flow problems.
The objective: longer terms and better credit
Your nursing home should have two objectives when it asks vendors for terms. First, it should negotiate the longest possible terms from your vendor in order to derive the maximum cash flow benefit.
The second, and equally important, objective is to maintain or improve your business credit while you negotiate terms. This article teaches you how to accomplish these objectives.
What if vendors don’t want to offer terms?
The first challenge your nursing home may encounter is that some vendors may not want, or be able, to offer terms. There can be a couple of reasons for this challenge.
Some vendors, especially smaller ones, simply cannot afford to offer terms. In this case, there isn’t much you can do. You must make a business decision regarding working with the vendor.
However, most vendors won’t offer payment terms if your nursing home does not have a solid credit profile on credit bureaus, such as Dun and Bradstreet or Experian. In this scenario, you need to start building your company’s credit profile.
Fortunately, you can build credit relatively quickly if you approach it correctly and methodically.
Negotiating terms when you don’t have credit
First and foremost, buy a copy of your nursing home’s commercial credit report. These reports are relatively inexpensive and give you a good idea of where your company stands – allowing you to develop a strategy.
Once you start negotiations, expect pushback if your corporate report has limited or negative information. If your vendors object to providing terms, negotiate short payment terms of five or ten days. Most vendors will agree to that request. Five- to 10-day payment terms may not be a lot, but it’s enough to get the process started.
This process can also be used to improve cash flow if your nursing home has good credit and gets terms.
Pay your vendors a little early
Once you have obtained credit terms, make sure that you pay vendors a few days early. This step is simple, but critical, as it helps develop a positive track record.
After you have built a track record of early payments, renegotiate better terms with your vendors. Many accounts receivable managers are open to discussing better terms if they see three to six months of early payments.
Being overly aggressive in your negotiations could backfire. Instead, try to work your way up to 30 days and, eventually, 40 days. Throughout the process, keep paying these vendors a little early.
Strategic early payments improve corporate credit
One way to improve this process is to make early payments selectively. Determine which of your vendors reports their payment trends to commercial credit bureaus. All you have to do is ask them, and most will tell you. By the way, some of this information is also listed on your commercial credit report.
Make early payments to vendors that report to credit bureaus and to vendors with whom you are negotiating longer terms. Pay everyone else on time. This approach encourages vendors to give you better terms and improves your credit.
Obviously, as the credit of your skilled nursing facility improves, you can negotiate better terms.
Never pay late
One important aspect of this strategy is to avoid paying vendors late. Late payments jeopardize your ability to negotiate credit and obtain terms.
If you must pay a vendor late, consider advising them ahead of time. This step may be difficult, but it should help maintain your reputation as a payer of integrity.
What to do if you still have cash flow problems
If your nursing home still has cash flow problems after applying this strategy, consider reading “Diagnosing Cash Flow Problems in an SNF.” The article helps you pinpoint possible cash flow issues and suggests solutions.
Finally, many nursing homes experience cash flow problems because private and government insurance programs can take weeks or months to pay. In this case, read “Financing an SNF with Cash Flow Problems.” The article discusses how to use a financing solution called medical factoring (learn more here) to handle this common working capital problem.
Marco Terry is the founder and managing director of Commercial Capital LLC, a leading provider of medical factoring financing to nursing homes. He can be reached at (877) 300-3258.
