Control Account: How does it work?
For businesses that have not borrowed against their accounts receivable before, one of the most frequent questions our Sales team hears from prospective clients is, “What is a control account and how does it work?”
The first part of the question is pretty straightforward. A control account is just a special kind of bank account that gives a third-party (the lender) access to the account. A control account is usually a condition of a loan, since it allows the lender to access the funds from the borrower’s account in the event of a default or bankruptcy.
There are many benefits to this kind of arrangement for both the borrower and the lender. The biggest benefit is that it makes it easier for you, the borrower, to obtain a line of credit, especially when a traditional bank loan does not meet your needs. It also lowers the risk for the lender, allowing them to offer you a line of credit where banks might not. Lower risk for the lender also translates into a more favorable rate for the borrower.
“How does it work?” is a little more complicated.
Separating inflows and outflows
If your healthcare company is like most businesses, you have only one checking account that you use for both deposits and withdrawals. All your receipts are deposited there and all your payments to vendors come from there.
To borrow against your Accounts Receivable, things will need to get a little more granular. Specifically, your business will need to separate inflows and outflows of money. Inflows will go into one account* and outflows will come from another. Another account in the middle, a concentration account, will link the two accounts.
This diagram will help explain how it works. In this case, a company has their customers deposit payments into a new account which is governed by a control agreement. That account automatically “sweeps” the money on a daily basis into a concentration account owned by Inspira. In turn, Inspira then sweeps the money on a daily basis back to the operating account. From there, the business pays its bills normally. At the end of the month, instead of having to pay a bill from Inspira, Inspira retains the amount owed and sweeps the remainder to your operating account.
Leonard Bryant, President of North Oak Regional Hospital and one of Inspira’s clients, explains, “The control account proceeds are passed through to us as if we collected it on our own. It is our bank account, it’s just subject to their control. It’s as if the control agreement were not in place. It is, but the collections just pass through to us.”
New operating account or new payment account?
While it may seem daunting to ask your payers to send payments to a new account, Inspira can help because we have done this many times for clients just like you. Some businesses, especially those who are looking to change banks anyway, view this as an opportunity to open a new deposit account at Inspira’s banking partner, MUFG Union Bank.
Other businesses want to avoid changing payment instructions and open a new operating account instead. This avoids any disruption in payment cycles, but can mean adjusting other parts of the company’s finances (automatic bill payments, payroll, etc).
Some banks do not offer control accounts, so check with yours to see if that is the case. Again, Inspira can help here with our established relationship with MUFG Union Bank.
Making it easy
Inspira wants to make it easy for you, so we can work with whatever you choose to do. As the President of North Oak Regional Hospital puts it, “My word for it is ‘straightforward.’ It’s not simple, of course, but it doesn’t have some of the complexity we have seen with other arrangements. There were fewer steps, although the steps Inspira required were the important ones. They just weren’t the superfluous steps others required. It’s like they had seen how others in the trade had structured their arrangements and they cut out the extraneous details, just focusing on what was important. Subsequently it was easier and faster.”
Inspira offers revolving lines of credit (RLOC) exclusively to physicians, medical offices, hospitals and healthcare agencies. How can Inspira help your company?
* Companies with both government and non-government receivables might need to open two control accounts, one for each kind of receivable.