What is Medical Factoring?
When medical practices or healthcare providers deliver goods or services, they usually send an invoice for payment later. These invoices are generated for services rendered to patients or other entities. In many cases, the invoice goes to an insurer. At other times, the invoice may be sent to the patient or another healthcare facility.
Healthcare providers experience slow payments from creditworthy customers, making them ideal candidates for receivables factoring. While waiting for payment, the medical practice still needs to order supplies, make payroll, and cover rent. Medical practices incur some of the highest operating costs among all industries.
The unpaid invoices in the practice’s accounts receivable are an asset. These accounts receivable represent money owed for services that have been rendered. Instead of waiting for payment, factoring allows the medical practice to convert unpaid invoices into cash.
Medical invoice factoring, also known as medical receivables factoring, is a financing method in which a business sells its invoices at a discounted rate. The financial institution that purchases the medical receivables sends an immediate cash advance based on the invoice value. Funding through medical factoring is typically received within days of submitting an invoice.
The factoring company then owns the invoices and collects payment on behalf of the client. Before releasing funds, the invoice payment is verified and processed to ensure accuracy and legitimacy. Once payment is received, the company releases the remaining invoice value to the medical practice. Accounts receivable factoring is a common practice in many industries. Healthcare providers who accept private or government insurance programs can use factoring.
How does Medical Factoring work?
Medical invoice factoring involves working with a financial institution, commonly referred to as an invoice factoring company or Factor. The Factor purchases the invoices at a discounted rate and issues a cash advance at the advance rate, providing immediate capital to the medical practice. Most discount rates range from 1% to 5%, and most advance rates fall between 75% and 95%, although some companies offer a 100% advance rate.
After subtracting the advance amount from the discounted price, the remaining balance goes into a reserve account. Once the customer pays the invoice, the Factor releases the reserve amount minus its fees. Many medical factoring companies require a set number of net monthly receivables payable to qualify for their services.
Let’s look at an example to illustrate how medical receivables factoring works.
Medical Receivables Factoring Example
The John Smith Medical Group has a factoring agreement with the following terms:
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Advance rate: 95%
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Discount rate: 2%
If the factored invoices total $100,000. The Factor applies the discount rate of 2% and purchases the invoices for $98,000.
The Factor then applies the advance rate of 95% and issues an advance for $93,100. The Medical Group receives the advance via wire transfer within 24 to 48 hours.
The remaining $4,900 is deposited into a reserve account, and the Factor waits to be paid. Once the clients pay their invoices, the Factor releases the reserve amount.
What’s the difference between Medical & Healthcare Factoring?
While most medical and healthcare factoring is similar, there are some key differences. Choosing the right healthcare factoring company is crucial for providers who want to factor healthcare receivables, as it ensures reliable cash flow solutions tailored to the unique needs of the healthcare industry.
Medical Invoice Factoring
Medical receivables factoring refers to a medical practice, such as a doctor’s office, an optometrist’s office, or a dental office, that provides medical care to patients. In these cases, the practice factors invoices that are sent to insurance companies or government agencies, such as Medicare.
Healthcare Invoice Factoring
In healthcare invoice factoring, businesses that supply goods or services to medical practices factor invoices for amounts owed. Examples include medical staffing agencies, nurse staffing agencies, medical coding companies, medical supply companies, and equipment suppliers. In these cases, the healthcare provider factors invoices that mainly go to medical practices. For example, a healthcare staffing company might factor its accounts receivable to cover payroll. Medical staffing companies often experience delays between receiving payment and making payroll. Companies can use the funds to purchase inventory, upgrade technology, or purchase supplies, which is another everyday use of factoring proceeds.
What is a Medical Factoring Company?
Medical factoring companies are financial institutions that provide factoring services to medical providers. A medical factoring company is a type of financial company that specializes in healthcare receivables. Most healthcare factoring companies are fintech lenders or lending marketplaces.
Each company works a little differently. Let’s compare the differences between factoring arrangements. Medical factoring companies also serve other businesses in the healthcare sector beyond direct providers.
Factoring Fees
The first thing to consider is the cost. Invoice factoring will always be an expensive way to secure financing, but some companies are far more costly than others. You want to ensure that you can afford the fees and that the cost of funding is worthwhile for your business.
Recourse vs. Non-Recourse
Recourse factoring means your company is liable if your customers default on their invoices. In non-recourse factoring, you don’t have to pay if your customers default due to specified reasons such as bankruptcy. Non-recourse factoring is more expensive, but the added protection may make it worthwhile.
Notification Factoring
Some factoring companies will notify your customers when they purchase the invoices, and others will not. If you don’t want your customers alerted when you sell their invoices, look for a company that doesn’t notify them. UCS doesn’t use notification factoring.
Additional Services
Some invoice factoring companies stand out because they offer enhanced services to help you process invoices. Some additional services to consider when looking for a factoring company include:
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Easy invoice uploads.
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Integration with your accounting software.
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Credit checks on your customers.
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A/R processing tools.
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Online portals or mobile apps for convenient processing.
How to apply for Medical or Healthcare Factoring:
You can apply for invoice factoring through United Capital Source. Follow these instructions to apply for invoice factoring.
Step 1: Make sure your customer is reliable.
Factoring invoices only works when your customers pay their invoices on time and in full. Ensure you’re certain your customers will pay before contacting a Factor.
Step 2: Gather your documentation.
When you apply, the Factor needs to review the following documents:
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Driver’s license.
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Voided business check.
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Bank statements from the previous three months.
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Business tax return.
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Accounts receivable aging report, Accounts payable report, and debt schedule.
Step 3: Apply.
You can complete our one-page application or contact us by phone to apply. Either way, you’ll need to provide the information above and the invoice amount you want to sell.
Step 4: Speak to a representative.
Once you apply, one of our representatives will contact you to discuss the factoring fee, factoring rate, and terms associated with the sale. You’ll get an upfront breakdown of all costs, so you don’t have to worry about hidden fees.
Step 5: Receive approval.
The entire process takes about two weeks to finalize. Funds will appear in your bank account 1-2 days after completing the application.
What are the advantages of Medical Factoring?
Medical invoice factoring qualifications are less stringent than those for a loan, and approval depends more on your customers’ creditworthiness than your own. Some factoring companies don’t require a minimum credit score, making it a feasible solution for businesses that don’t qualify for a traditional loan.
Medical factoring isn’t a loan, so you don’t incur debt. It’s a viable alternative for medical practices or healthcare companies in urgent need of funding that don’t want to add to their debt.
Some healthcare companies prefer that the factoring company collect on the invoice. It can save time and money since the factor essentially acts as your collections department. However, some businesses do prefer to maintain a direct relationship with their customers. If this applies to you, look for a company that doesn’t notify your customers when it acquires their invoices.
The most significant benefit is turning accounts receivable into working capital. Unpaid invoices are like unsold inventory – the longer they go without converting into cash for your business, the less profitable they become. Medical factoring allows you to unlock that capital sooner, enabling you to reinvest it in your practice.
What are the disadvantages of Medical Factoring?
The biggest drawback is that medical accounts receivable financing is more expensive than traditional loans. Like most near-term and short-term financing, medical factoring carries higher rates and fees than conventional long-term business financing.
Due to the complex nature of medical receivables factoring, it’s also difficult to compare costs to a loan or other forms of financing. The time it takes for your customers to pay their invoices determines your factoring fee, so the cost may vary.
Factoring medical receivables is not the only way to avoid late payments and convert invoices into cash. Sometimes, all you need to do is improve billing. You can try automating your invoices, offering customers more payment options, and enhancing your collections team’s efforts.
We prepared a pros and cons summary of factoring for quick reference.
Medical Factoring Pros & Cons
Pros:
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Turn unpaid invoices into cash.
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Easier to qualify for than other business financing options.
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You can use the funds for various business purposes.
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Invoices are collateral.
Cons:
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Higher rates & fees than traditional loans.
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Fees are based on the time it takes insurers to pay their invoices.
Frequently Asked Questions
Here are the most common questions about medical and healthcare invoice factoring.
Why do businesses use Medical Invoice Factoring?
Invoice factoring provides several benefits to medical and healthcare companies.
Early Access to Working Capital
Medical practices and healthcare companies mainly factor invoices to access working capital without waiting for customers to pay. Getting working capital sooner than scheduled can be a lifeline for businesses facing cash flow shortages.
Positive Cash Flow
Cash is the lifeblood of any business. Medical practices need to have money on hand to cover their daily expenses. Medical and healthcare companies utilize factoring to achieve predictable cash flow and accurate budgeting.
Can I get Medical Factoring with bad credit?
One of the reasons medical companies turn to accounts receivable financing is that they lack sufficient credit to qualify for a traditional bank loan. Factoring companies approve businesses based on customer credit since the Factor gets paid when customers pay their invoices.
Most factoring companies accept businesses with poor credit, and some don’t require a credit score. This is especially true for medical practices that typically serve clients such as insurance companies and government payers, including Medicare.
Medical Factoring – Final Thoughts
Medical invoice factoring is a viable option for practices that need immediate working capital but can’t qualify for a traditional loan. While the rates are higher than those of a bank loan, gaining access to the funds needed to stabilize cash flow is a lifeline for practices struggling to cover their operating expenses.
Large healthcare facilities and those with established credit can likely find less expensive financing. In addition, medical businesses that use factoring should consider it as bridge financing while building the necessary credit for more favorable working capital loans.
Contact us if you’re a medical practice or healthcare company that wants to learn more about invoice factoring in the medical industry. Our loan experts will discuss your business needs and help you find the right small business loan option to achieve your goals.
