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High Noon. Chapter 9 Code Blue Health Science Edition 4. 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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High Noon Chapter 9 Code BlueHealth Science Edition 4
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
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
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.
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!
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!
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.
Brannan Community Hospital’s 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.
Brannan Community Hospital’s 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.
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.
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.
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.
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.
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.
Situation in this chapter • In Chapter 9, the bank wants to call the hospital’s 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.
Administrator’s 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 don’t loan their own money. They loan the funds of their depositors, whom they must protect.
What can Wes Douglas offer the bank? • He can offer more collateral—the 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.
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.
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.
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.
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.
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 collateral—in this case a valuable piece of property owned by the hospital.
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.
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.
