High Noon

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High Noon

• Chapter 9
• Code BlueHealth Science Edition 4

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Everyone will deal with banks sometime in their
life

• Certainly in their personal life
• Checking accounts
• Savings plans
• Home mortgages
• Possibly in their professional life as an officer
  or administrator in a healthcare facility

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It is nice, therefore, to know a little about how
they work

• Banks make their money by
• Providing services to customers like checking
  accounts, servicing loans, and so on
• Loaning money to individuals and businesses

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Where does the money for loans come from?

• Primarily from deposits made by customers and
  from loans from the Federal Reserve
• When money is loaned out, it must be loaned at a
  higher rate than the rate paid to depositors, or
  the bank will lose money.

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Losing Money

• There is a more dramatic way that banks can lose
  money, however . . .
• By having those who borrowed the money fail to
  repay it!

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Default on Loan

• This is a costly situation for banks.
• Think about it. If a bank loans 100,000 at 6
  for a year, the most they can make is 6 x
  100,000 6,000.
• The most they can lose, however, is 100,000!

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Increasing the Safety of Loans

• Banks usually require collateral when making a
  loan.
• The collateral can be a piece of property, or, in
  the case of Brannan Community Hospital, accounts
  receivable.

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Brannan Community Hospitals Line of Credit

• Sometimes banks will sign an agreement to loan a
  hospital a fixed amount of money at a stated rate
  for a year using accounts receivable as the
  collateral.
• The hospital can borrow up to 70 of the value of
  the receivables.

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Brannan Community Hospitals Line of Credit

• If the hospital fails to pay the loan or line of
  credit off, the bank can take ownership of the
  receivables.
• They then collect money from patients and keep it
  to repay as much of the loan as possible.

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Calling a Loan

• A bank may call a loan it if it feels the
  hospital is in danger of going bankrupt.
• At that point, the entire amount owed by the
  hospital must be paid back immediately.
• If not, the bank can seize the collateral.

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Personal Loans

• In some situations, the same thing can happen
  with personal loans.
• Fail to make payments, and the entire balance may
  come due immediately.
• Fail to pay and the bank can take the collateral
  you offered for the loan, such as your car, your
  home, etc.

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Business Loans

• Businesses like hospitals are often forced to
  extend credit to customers.
• This means that they provide goods and services
  to patients that will be paid for later.

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Business Loans

• The goods and services provided to patients on
  credit cost the hospital money.
• Prior to receiving payment from patients, to pay
  their employees salaries -- and to pay their
  vendors -- hospitals must take out loans.

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Business Loans

• One type of loan is called a line of credit.
• Brannan Community Hospital has a line of credit
  secured by its accounts receivables.
• What this means is that this loan will be paid
  off when patients pay off their bills.

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Situation in this chapter

• In Chapter 9, the bank wants to call the
  hospitals loan.
• If this occurs, the hospital would go out of
  business.
• The hospital depends on its accounts receivable
  for money to pay its employees.
• It would be unable to pay payroll.
• It could not make payments to vendors for
  supplies purchased.

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Administrators Dilemma

• Wes Douglas, of course, wants to avert the
  closure of his hospital.
• Somehow, he must convince the bank that it is not
  in their interest to close the hospital.
• Remember, banks dont loan their own money. They
  loan the funds of their depositors, whom they
  must protect.

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What can Wes Douglas offer the bank?

• He can offer more collateralthe bank finally
  wants to put a lien on the Magnetic Resonance
  Imaging machine recently purchased by the
  hospital.
• He can offer a business plan showing that the
  hospital can reverse its losses.

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He plays one other card . . .

• He points out that closing the hospital would
  drastically harm the economic viability of the
  city, which, in turn, would financially harm the
  bank.

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How?

• The hospital is the largest employer in the
  community.
• Many hospital employees who are also bank
  customers would lose their jobs.
• Many of these individuals would leave the
  community for jobs elsewhere.

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How?

• As hundreds of homes come on the market, the
  value of property in the community will decrease.
• This will decrease the value of homes, which
  typically serve as collateral on home mortgages
  the former hospital employees will be unable to
  pay.

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Wycoff has another idea . . .

• Wycoff, an independently wealthy member of the
  board, has another idea.
• He is willing to do what many hospital board
  members have done when their hospitals are in
  trouble . . . guarantee the loan.

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What does it mean to guarantee a loan?

• He will sign a contract stating that if the
  hospital does not pay its loan off, he will be
  personally liable.
• He, of course, wants some protection for himself.
• He wants collateralin this case a valuable piece
  of property owned by the hospital.

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Why does this matter to you?

• Many health professionals start their own
  businesses (doctors, physical therapists and so
  on).
• Unless these professionals are wealthy, they will
  need loans to provide money to pay salaries, buy
  equipment and supplies, and so on.

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Why does this matter to you?

• Understanding what a line of credit is, why it is
  needed, how it is paid off, and when it can be
  called by the bank is an important concept for
  anyone who starts a healthcare business or works
  for a healthcare business.

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The End