Accounts receivable factoring can be extremely advantageous for medical practices. For some doctor’s offices, this type of working capital loan is vital for staying current on bills and payroll. There will always be invoices and patient deductibles that do not get paid in time for you to cover regular business expenses. Insurance providers and patients often have to be “chased down” to ensure a payment is even going to come in at all. You could hire a collections agency or write-off the debt but neither option will actually fill in the gap in cash flow. Another option is a small business loan. If you need a substantial amount of cash, however, it might not be possible to be approved for that amount while you are waiting to be paid.
This is what makes accounts receivable factoring so useful for this all-too-common situation. But just like any other small business loan, there are several things to consider before deciding that this is the most sensible solution for your unique circumstances.
1. Not every invoice is eligible for purchase
With accounts receivable loans, the payment you receive from the business lender, or “factor” is not solely based on the size of the outstanding invoice. The factor also looks at your customers’ payment and credit history along with the date of the service performed. This gives the factor an idea of how likely it is that they will be able to collect the entire amount that is owed.
Accounts receivable factoring leaves the factor in charge of collecting from the insurance provider or patient. Since some bills never get paid, the factor must never fully dismiss the idea that their attempts to collect the money will be for naught. So, if the factor concludes that the likelihood of the payment being collected isn’t as high as it should be, the borrower receives a smaller percentage of the total amount. The factor may simply refuse to purchase an invoice if the insurance provider or patient has not given the impression that the bill will eventually be paid in the near future.
2. You don’t always get a second payment
The rise of high-deductible plans means patients are now footing a higher portion of their medical bills. Patients often take several months to pay in full, even if the amount is medium-sized at best. If a customer is discovered to have a history of delinquent payments and a low credit score, the factor may offer to purchase the unpaid account but suggest that you don’t serve that patient or work with that insurance provider anymore.
Accounts receivable factoring is meant to be used more than once. So, before you contact a potential factor, take a look at the outstanding receivable you want them to purchase. Is there any reason to believe the factor’s collection attempts will be unsuccessful? A factor will probably not want to work with you again if they have a hard time trying to collect the first invoice they purchase from you. Both you and the factor could lose money in this scenario. You may have heard that as soon as the factor collects the full amount, the borrower gets a percentage of it. But this only happens if the factor is able to collect the amount on time and without trouble. You should talk to potential factors to learn what could prevent them from giving you that last payment.
3. You may be able to factor government accounts
Different business lenders might have their own policies regarding government programs. The government is traditionally viewed as a reliable payer, but from a legal standpoint, Medicare and Medicaid are only permitted to reimburse you, the doctor’s office. These programs cannot legally make payments to business lenders. You can solve this dilemma if your potential factor offers invoice discounting or “lock box” accounts.
With the first option, the borrower maintains responsibility for collecting the full amount. When the amount is collected, the borrower sends it to the factor. The second option, which is reportedly much more popular for medical practices, allows you to legally receive reimbursements from federal programs. Once you receive the funds, the bank transfers the money to the factor.
4. Be sure you this is something you truly need
Most factors offer contracts lasting from two to three years. Before signing, you should make sure your need for accounts receivable factoring justifies having that expense on your balance sheet for this time frame. If not, you’ll be spending a long time paying for a service you only use sparingly, if ever.
Accounts receivable factoring generally costs more than most traditional business loans. The expense is even greater if your insurance providers or patients are deemed unlikely to pay, regardless of how much they owe. You’ll get less cash, too. High fees can very easily be attached to a relatively low unpaid bill.
There are plenty of other options for medical practices
As you can see, accounts receivable factoring isn’t necessarily for every medical practice that frequently deals with delinquent payments. There may be some changes you need to make on your own before contacting a potential factor, but we are more than happy to explain these changes to you in hopes that we can work together in the near future. And since our business loans are among the most accessible on the market, there is likely another business funding program that would make more sense for you at this point in time.