Healthcare organizations’ finance and treasury leaders should consider the role of a line of credit as part of a global resource allocation effort.
In the face of widespread shutdowns and heightened market uncertainty in the early months of the COVID-19 pandemic, many hospitals and health systems secured commitments to lines of credit to ensure they would have adequate liquidity to respond to widespread pandemic-related revenue dislocations. This initial period of disruption saw a range of line utilization strategies, with variations in facility sizing and in drawn or undrawn status. With the liquidity crisis behind us, should health systems now trim back on credit lines or shift their utilization strategy? To answer this question, health system leaders must consider the credit line’s purpose in a greater context.
The credit line’s larger purpose
A line of credit is a resource-enhancing strategy wherein an organization pays a commitment fee plus undrawn or drawn fees to access supplemental liquidity from a commercial bank provider. For most organizations, a line offers the prospect of leveraging available cash, ideally coordinated with an organization’s other resources, including working capital, long-term investments, debt capacity and cash flows. Employing a line of credit is a decision involving the total balance sheet that must integrate several concerns.
Traditionally, organizations maintain lines for times when they do not have enough cash or unrestricted liquidity resources to effectively manage operating cash flow variability. In such a case, the line of credit has a clear functional role and the focus should be on transactional characteristics such as amount, tenor and fees.
For organizations that have enough cash and liquidity, the focus shifts to the strategic rationale for the line and how this external resource works in combination with internal resources to enhance the organization’s total risk-return profile.
Today’s environment poses several challenges to organizations seeking to strike an optimized balance between responding to operating/strategic risks and headwinds and pursuing return. Resources — specifically unrestricted cash and investments — that can serve as a throttle in managing this risk-return balance are particularly valuable in this environment; and resources such as lines of credit that can introduce prudent leverage into the equation can add value by freeing cash and investments to prioritize the pursuit of return.
Thus, a line of credit’s role is less about a debt-financing decision in isolation and more about holistic financial management that extends into optimizing cash and investment substrategies.
A line of credit is not a substitute for cash and investments. But it may enable better stewardship of those resources when applied in the context of a broader resource management plan.