Aged care provider finance in Australia

Aged care finance splits into two entirely separate problems that searchers routinely conflate. Buying or building a facility is a property and construction financing question. Funding the operation is a working capital question driven by government payment timing and compliance costs. The lenders, the products and the terms are different for each.

Facility purchase versus operating finance

The two are worth naming clearly before anything else.

Facility finance is the acquisition, construction or refurbishment of a residential aged care home. This is commercial property lending with an operating business attached. It involves valuation, construction risk if you are building, and long terms. Lenders in this space are typically major and second-tier banks and specialist commercial property financiers, and the transactions run into the tens of millions.

Operating finance is the working capital a provider needs to run: wages between subsidy payments, agency staffing costs, equipment, vehicles, and the cost of compliance obligations. This is standard business lending, and the products are overdrafts, lines of credit, asset finance and term loans.

Most searches that land on aged care finance are actually about the second, but the results are dominated by the first, because the transaction sizes attract more attention.

How do refundable accommodation deposits affect your balance sheet?

This is the single most misunderstood item in aged care finance.

A refundable accommodation deposit is a lump sum paid by an incoming resident for their accommodation. It is refundable when they leave, less any amounts the law permits to be deducted. Residents may instead pay a daily accommodation payment, or a combination of the two.

For the provider, a RAD balance is:

• Cash in the bank today. It is available and it does not accrue interest payable to the resident.
• A liability on the balance sheet. It is owed back. It is not equity and it is not revenue.
• Subject to prudential obligations. There are rules about permitted uses and about refunding within required timeframes.

The practical effect is that a facility with a large RAD pool looks cash-rich and is simultaneously carrying a substantial liability that can be called in an order you do not control.

Lenders understand this well, and it shapes how they assess you. What they look at:

RAD inflow and outflow patterns. A stable occupancy profile produces predictable turnover. A facility with unusually high turnover, or a cluster of long-stay residents likely to depart in a similar period, carries more refund risk.

Your liquidity against refund obligations. Whether you can meet refunds without relying on new residents arriving to fund departing ones.

The RAD to DAP mix. A higher proportion of residents choosing daily payments means less lump sum capital but a smaller refund liability and steadier income.

Using RAD capital to fund capital works is permitted within the rules, and it is common practice. It is also the point at which a provider's balance sheet becomes genuinely complex, because long-lived building assets have been funded with a liability that can become payable at short notice.

A worked view of the RAD position

Consider a 90 bed facility running at 94 per cent occupancy, where 60 per cent of residents have paid a RAD averaging $420,000 and the rest pay a daily accommodation payment.

That is roughly 51 residents holding RADs, or a pool of about $21.4 million sitting on the balance sheet as a refundable liability.

If average length of stay is around two and a half years, roughly 20 of those RADs turn over each year, meaning about $8.5 million is refunded and, in a stable facility, roughly the same amount arrives from incoming residents. The net position looks calm.

The risk is not the average. It is the variance. A quarter where eight residents depart and only four beds are refilled at RAD rather than daily payment leaves you refunding around $3.4 million while receiving about $1.7 million. That $1.7 million gap has to come from liquidity, not from next quarter's admissions.

This is exactly the scenario a lender models, and it is why a facility that appears cash-rich can still be assessed as liquidity-constrained. If your RAD pool has funded building works, the cash to cover that gap is in the walls.

What does the government funding timing do to cash flow?

Subsidy payments are reliable, which is the good news. They are not immediate, which is the part to plan for.

Residential care subsidy is paid to providers in arrears following claiming, and the assessed funding level for each resident depends on their classification under the current funding model. Two consequences follow.

First, there is a lag between delivering care and being paid for it. Wages are paid fortnightly. Subsidy arrives on the government's cycle. That gap is permanent working capital, in the same way it is for any provider paid in arrears.

Second, the classification process itself creates timing risk. A new resident's funding is not settled the moment they walk in. Between admission and assessment being finalised, you are providing care at a cost you know against revenue you are estimating.

For home care and community providers the timing question is different again, and reforms in recent years have changed how packages are administered and funded. If you operate in that segment, model your specific arrangements rather than relying on general guidance, because this part of the sector has moved substantially.

Compliance capital expenditure is not a one-off

The mistake in a lot of aged care financial modelling is treating compliance spending as a project that finishes.

Recent years have brought sustained regulatory change across building standards, fire safety requirements including sprinkler mandates in some jurisdictions, staffing and care minute obligations, and quality standards. Each has carried a capital or operating cost.

For finance purposes, what matters is that this is a recurring line, not an exception:

• Building and fire compliance. Sprinkler installation, egress, and structural upgrades in older facilities. Genuine capital works, financed as such.
• Care delivery requirements. Staffing obligations are operating costs, and they raise your fixed cost base rather than requiring capital. But they change the covenant picture, because they compress margins.
• Systems and reporting. Clinical and quality reporting obligations have grown, and the systems to meet them cost money.

A lender assessing a provider will want to see that you have budgeted for compliance as an ongoing item. Providers who present compliance spending as finished tend to be assessed as optimistic.

What products fit which need?

The recurring theme is matching the product to the shape of the need. A compliance refurbishment is a defined project and suits a term loan. The subsidy timing gap is recurring and proportional to occupancy, so it suits a revolving facility.

What will a lender want to see?

Beyond financial statements:

• Occupancy history and current occupancy. The single most important operating metric.
• Your RAD balance, refund history and RAD to DAP mix.
• Accreditation status and any current or recent regulatory findings. A provider with open compliance matters is a materially different credit proposition.
• Your compliance capital plan for the next three to five years.
• Staffing model and agency reliance. Heavy agency use signals both cost pressure and operational risk.

Providers who bring these unprompted are treated very differently to those who do not.

General information only - it doesn't take your situation into account. Consider whether a product suits your business before acting, and get independent advice where you need it. No credit check to see your options. A credit check only happens if you choose to formally proceed with a lender.