Addiction Treatment Center Financing for Starting a New Facility

What Makes Addiction Treatment Center Financing Different From Other Healthcare Startups

It is not unusual for a healthcare business to be billing insurance in short order after it opens. A dental office or dermatology practice, for instance, will have its state license in hand and can expect claims to come in a matter of weeks. Addiction treatment center financing is a different matter; one has to plan for a longer runway. Such facilities are required to get the go ahead from the state behavioral health department before they can open. On top of that, The Joint Commission notes that certain commercial payers and Medicaid in some states will only reimburse if the center holds CARF or Joint Commission accreditation. Since getting accredited is a multi-month undertaking, most see to it that the work is done well in advance of opening day.

Addiction treatment center financing requests get more scrutiny from lenders than a typical small business loan, and the main reason is the lag between spending money and collecting it. The facility’s profit potential is not the only thing the lender is concerned about. It’s asking if that margin is something the owner can live with. Hence, the best applications clearly state the timeline, rather than relegate it to a footnote.

What Rehabilitation Center Funding Needs To Cover Before You Open

For a startup, the bulk of the budget is generally consumed by real estate and renovation costs. There is no getting around the fact that a state will not issue a license until a facility is in full compliance with space, safety and fire codes; to that end, one can expect leasehold improvements to be far more extensive than what you would see in an ordinary medical office. Then there are the outlays for equipment and technology, from clinical monitoring apparatus to an electronic health record system suited to the demands of behavioral health documentation.

Staffing is one expense that new owners can easily underestimate when planning their addiction treatment center financing. Clinical staff, counselors, and administrative employees may need to be hired and paid before the facility starts receiving money from insurance claims. Marketing costs can also begin before the facility opens, since building referral relationships with hospitals, primary care practices, and drug courts takes time.

A rough breakdown of what rehabilitation center funding typically needs to cover:

• Real estate lease, purchase or build-out and code compliance
• Clinical and administrative equipment, plus an EHR and billing system
• Pre-licensing payroll for clinical and administrative staff
• Marketing and referral-network development, including outreach to drug courts and hospitals
• Working capital to cover the months between opening and the first reimbursement

Which Loans To Open A Rehab Center Match Each Startup Cost

Real estate and renovation costs may be financed with a term loan or an SBA-backed loan. SBA 7(a) loans can be used for expenses such as real estate, equipment, and working capital, depending on the loan and the business. This can make them one option for addiction treatment center financing when a facility needs to cover larger costs and repay them over a longer period.

Equipment financing frees cash for costs that a bank can’t collateralize, such as staffing or a security deposit. This gap between payroll and rent is covered before you start billing. This is called a business line of credit or a working capital loan. A business credit card is usually a better fit than a term loan for smaller, ongoing expenses like software subscriptions or office supplies.

Financing options that commonly appear in addiction treatment center financing plans:

• Term loans or SBA 7(a) loans for real estate and renovation
• Equipment financing for clinical and administrative equipment
• A working capital loan or business line of credit for payroll and rent before billing starts
• A business credit card for smaller, recurring purchases
• Bank loans for revenue-based needs once billing starts

While a full startup budget is seldom met by crowdfunding in and of itself, it can be an occasional supplement for the likes of a minor renovation. In some cases, facility owners who have set up as non-profits will put in for grants in addition to their regular loans.

How Insurance Coverage Affects Approval For Rehab Center Loans

Lenders look at more than the loan amount. They look at how a facility plans to get paid once it opens, and a diversified payer mix signals lower risk than relying on one source of revenue.

Medicaid and Medicare can both cover certain substance use disorder (SUD) treatment services. Medicaid is the largest payer for mental health services in the United States, according to Medicaid.gov, and also plays an important role in paying for substance use disorder treatment. Private health insurance is another source of payment, particularly when a treatment center is in-network with insurers such as Aetna or Cigna. The Affordable Care Act (ACA) also requires most individual and small-group health plans to cover mental health and substance use disorder services as essential health benefits. For lenders reviewing addiction treatment center financing, these different sources of payment can help show where the facility expects its revenue to come from.

The picture is one that is supplemented, not supplanted, by public funding for addiction and recovery services. There are grants from the Substance Abuse and Mental Health Services Administration (SAMHSA), for instance. Then there is the Substance Abuse Prevention and Treatment Block Grant, which has for the most part been absorbed into the Substance Use Prevention, Treatment, and Recovery Services Block Grant to provide for those lacking insurance or means of their own. In certain states, low-income patients can also turn to public assistance programs to defray expenses. For anyone whose policy will not cover the tab in full, self-pay and payment plans make up the rest. It is precisely such a well-rounded payer mix that lends strength to a request for addiction treatment center financing.

How To Build A Business Plan For Addiction Treatment Center Financing

When reviewing addiction treatment center financing, a lender may want to see when the facility expects to complete licensing and accreditation, start accepting patients, and begin receiving insurance payments. Including these dates in the business plan helps the lender understand how long the facility may need funding before revenue starts coming in. A plan that lists the costs without explaining this timeline may leave the lender with questions about how the business will manage its expenses during that period.

The request for funds should be separated by the categories listed in the previous outline: real estate, equipment, staffing, marketing, and working capital reserve. Indicate the type of financing that is most appropriate for each category.

A checklist worth including in any addiction treatment center financing plan:

• A market and referral analysis, including hospitals and drug courts likely to refer patients
• A licensing and accreditation timeline with realistic milestones
• A staffing plan tied to the level of care offered, whether outpatient treatment programs, partial hospitalization programs (PHP) or another model
• Revenue projections that account for the lag between opening and first reimbursement
• A contingency reserve for delays in licensing or slower-than-expected admissions

What Lenders Flag In Loans To Open A Rehab Center

Certain patterns show up again and again in addiction treatment center financing applications that get rejected.

• A funding request that ignores the pre-licensing revenue gap entirely
• No documented accreditation plan, whether through CARF or The Joint Commission
• Revenue projections built around a single payer instead of a mix of Medicaid, private insurance and self-pay
• One lump loan requested for costs that would fit better as separate financing types
• A staffing plan that does not match the intensive outpatient programs or detoxification services offered

Conclusion

Addiction treatment center financing requires careful planning because many expenses begin before the facility can start treating patients and receiving payments. Owners need to account for the time required for licensing and accreditation, decide which type of financing makes sense for each expense, and show lenders where the facility expects its revenue to come from. A clear plan for real estate, renovations, staffing, working capital, and expected insurance or public funding can also give lenders a better understanding of how the facility plans to manage its costs before revenue begins.