Medical Factoring

Is medical factoring good for your business?

Medical professionals conferring around a table.

The Healthcare Industry is notorious for having an antiquated billing and payment system. With the added complications of insurance and layers of bureaucracies, medical bills could take weeks or even several months before they are being paid. Even though it is customary for medical companies to experience slow-paying customers, too many unpaid invoices can have negative consequences for businesses by restricting their growth and cash flow For that reason, medical companies could benefit from healthcare invoice factoring, also referred to as medical invoice factoring.

Healthcare factoring is a financing plan dedicated for companies in the healthcare industry that are struggling with cash flow issues due to outstanding invoices with net terms between 30 to 120 days. With healthcare factoring, medical companies can continue to save lives without having to worry about limited cash flow.

There are two types of medical companies that benefit from medical factoring: vendors and providers. Vendors are medical companies that sell medical goods or services, such as medical staffing, equipment, transcriptions or transportation services. Providers are individual or institution that provides health care services, such as dentists or physicians. Typically, providers bill third-party payers such as insurance companies, Medicare, and Medicaid.

Healthcare factoring is ideal for both vendors and providers because these type of businesses have the reputation of working with creditworthy, but slow-paying clients.

Problems & Solutions Faced by Medical/Healthcare Companies

Why would Healthcare companies need cash flow in the first place? Even though Healthcare is a trillion-dollar industry, it is still a competitive market. Similar to running any other type of business, each individual healthcare industry have their own expenses to take care of.

How Flexible Access to Working Capital Helps Healthcare Providers

Common use of working capital funds by healthcare and medical service providers:

  • “Rent and Utilities”
  • “Malpractice Insurance”
  • “Payroll”
  • “Office Space, Furniture, Equipment and Renovations”
  • “Medical Equipment and Supplies”
  • “Invest In Sales & Marketing”
  • “Healthcare Lawyers and Consultants”

Healthcare factoring is ideal for service providers who work with slow-paying clients.

With all this given, healthcare business also need to have extra capital in preparation of situations specific to the medical industry such as:

  • Threat of getting sued - In the medical field where lives are at stake, there is always the possibility of a company getting hit with a malpractice suit. Even though most businesses are required to have malpractice insurance, getting sued will still have additional, unplanned financial repercussions, including taking up valuable time. There is also the possibility of the lawsuit damaging the reputation of the business, which may be difficult and costly to repair, if at all.
  • No guaranteed patients - Opening a healthcare business does not necessary mean that it will have customers flowing in constantly. Like any other businesses, healthcare companies rely on referrals, happy customers, and marketing to ensure that they have customers.
  • Economic downturn or increase in local competition - Healthcare businesses aren’t immune to the economy downturn or rising business opportunities in the form of additional competition. When these changes happen, business must be prepared to take action to stay relevant and protect their market.
  • Healthcare Reforms - In recent years, there are many nationwide healthcare changes underway led by new government regulations. This will affect all aspects of the medical field, including how medical bills will be paid. An example of an ideal medical payment plan includes “value-based reimbursement” or “pay-for-performance” models, which medical businesses need to prepare for when these changes affect them.
  • Unexpected Losses - Unexpected events such as broken equipment or patient reporting bankruptcy can happen anytime.
  • New Equipment Needed - Or sometimes, the company just need upgrades, such as new equipment models, new computers, office renovation or new software updates, all of which can cost thousands of dollars.

How does Healthcare Invoice Factoring Work

Healthcare companies must work with a factoring company in order to obtain financing. Although there are many healthcare invoice factoring companies, each one works more or less along the same line:

Finding a Factor

After medical companies send out invoices with net terms between 30 to 120 days, they can start looking for a factoring company to sell invoices.

Once the company selects a factoring company, the factoring company will review the business. They will also review invoices and ask for more information including credit checks on clients and patients.

After passing this review, the healthcare company will sign an agreement with the factoring company. This agreement will include details about all fees, the payment plan, and the initial maximum dollar credit line, which would be the greatest factored amount outstanding at any time.

Assigning the Factor

After the agreement has been signed, the factor will give an advancement to the healthcare company called the advance rate, which is usually 80% - 90% of the invoice’s value. Healthcare company can get hold of this advancement up to 3 business days later.

Factoring usually involves transferring the responsibility of bill collections of the factoring company. The factoring company will contact the clients with information on how to send payments.

Client pays the Factor

After the client has paid for the invoice, the factoring company will send any remaining balances, known as the reverse amount, to the company. As compensation for their services, the factoring company will also deduct their service fee, or rebate, from the remittance.

Introducing Medical Receivables Financing

A similar financing plan and alternative to medical invoice factoring is medical receivables financing. Like invoice factoring, invoice financing also increases cash flow issues by providing advances on invoices. Both medical invoice factoring and invoice financing involve a third party company to coordinate the financing.

The main differences with invoice financing are that:

  • A credit check may not be necessary because financing companies have many tools to determine your customers’ reliability without a credit check.
  • The third party does not control or manage any part of the collection services
  • The third party can distribute the entire 100% of the advancement beforehand
  • Getting approval for financing is shorter than factoring and can only take a few hours or days
  • The process is usually all electronic, meaning withdrawing and paying back funds is fast and convenient
  • Usually no hidden fees or unexpected costs