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Feb 20, 2024
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There are two primary types of financing to raise capital for business needs, debt financing and equity financing. Debt financing is the involvement of borrowing money and paying it back with interest. Equity financing is when a business sells a portion of the available equity to shareholders in return for capital to fund business expansion initiatives. For hospitals that function as for-profit, equity financing would be a more optimal choice in that funds obtained will not need to be paid back in full due to investors backing the funds as part owners and seeking a return on the investment. Hospitals that function as non-profit would typically utilize two sources of funding including revenue from organizational operations or borrow funds through the issuance of debt financing due to restricted access to equity markets and the lack of access to shareholders that would be distributed dividends on earnings for additional funding requests (AHA, 2023).
Most for-profit hospitals would utilize the combination of debt and equity financing to balance the payback to the debt financing that would accrue interest through the life of the loan can result in a larger amount being paid back and not exhaust the debt-to-
income ratio that is evaluated with this financing option. The mixed-use of equity financing in this type of hospital system can be beneficial to attract robust investing funds that would increase the fiscal stability of the hospital for continual organizational growth in cutting-edge technology and talented medical specialties. This dual option of financing would also increase the cash reserves, while also developing credibility through investor networking with minimal risk with absorbent debt accrual through debt financing only (Rose, 2013).
American Hospital Association. (2023, April). The essential role of financial reserves in not-for-profit healthcare
. https://www.aha.org/guidesreports/2023-04-19-essential-role-
financial-reserves-not-profit-healthcare
Rose, R. (2013, June 27). Understanding financing options for hospitals, health systems
. Physicians Practice. https://www.physicianspractice.com/view/understanding-
financing-options-hospitals-health-systems
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SEE MORE QUESTIONS
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Recommended textbooks for you
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