Funny how in all the years you spent earning a medical degree, business classes were few and far between – if you took any at all. And yet, a private medical practice is a small business. In order for it to be successful, you need to know and understand how business works.
One such technicality is accounts receivable. This is the money coming in from the billing sent out or, in other words, it’s you getting paid. In theory, it’s a straightforward process: provide the service, bill for the service, get paid for the service. However, it’s rarely that simple.
Accounts receivable is your practice’s bloodline. It stimulates cash flow. You need it running efficiently and smoothly. Unfortunately, there are always invoices that don’t get paid promptly (or at all). This can cause a debilitating cash shortage and a lot of stress.
There are many ways to bridge the gap between sending out invoices and actually receiving the money. You can assign a staff member the laborious task of hounding delinquent payers, hire a collections agency, or simply write-off the bad debt. None of these supply the needed immediate cash flow. They still leave you struggling to pay your bills, floundering to meet payroll, or contending with any number of sticky financial situations.
The other option is taking out a small business loan. Going into debt while you wait to be paid may be unappealing, but it does keep your practice running. The trouble is, it’s not always possible to get funding to cover this situation. Enter accounts receivable loans, a.k.a. factoring.
Factoring has been around for a long time. It’s an unsecured loan against your outstanding accounts receivable. Essentially, you sell your outstanding accounts receivable to a factoring agency, which in turn pays you a percentage of the outstanding debt. The factoring agency then goes about the business of trying to collect the outstanding debt. If it’s successful, you may or may not get a percentage of the remaining amount. If the agency is unsuccessful, it takes the hit. Either way, you pay the factoring agency a service fee.
This sounds like a good deal, right? It can be. It can also be a bad deal. Here are some pro’s and con’s to consider before entering into one of these agreements.
THE PRO’S FOR ENTERING A FACTORING CONTRACT ARE PRETTY STRAIGHTFORWARD
- You get cash.
- Your staff isn’t bogged down with the collections process.
- You collect on bills that may never be paid otherwise.
- You minimize your write-offs.
- Your cash flow remains consistent.
- You don’t need collateral to secure the deal.
- You don’t relinquish any equity in your company.
This all sounds great, doesn’t it? At a glance, it is, but before you jump in and sign on the dotted line…
MAKE SURE YOU UNDERSTAND THE CON’S
The biggest drawback to factoring is that your payment is determined by the size of the outstanding account, your customers’ payment and credit history, and the date of service. If the factoring company determines it has a high chance of collecting the entire billed amount, you receive a higher percentage of the money owed. If the factoring company determines there’s a small likelihood of collecting the outstanding amount, you receive a smaller percentage of the total due. The factoring company may outright refuse to take an invoice if it’s been in arrears too long.
Other negatives to consider are:
STIGMAUSING A FACTOR CAN COME WITH A STIGMA. IT CAN BE SEEN AS A SIGN YOUR BUSINESS IS IN TROUBLE. IT CAN AFFECT HOW EMPLOYEES, CUSTOMERS, VENDORS, AND YOUR COMPETITORS VIEW YOUR BUSINESS AND YOU. BE PREPARED FOR NEGATIVE BACKLASH IF YOU CHOOSE TO USE FACTORING TO COLLECT OUTSTANDING ACCOUNTS.
LOSS OF CONTROL
If you rely on a factoring agency to collect your outstanding accounts receivable, they may tell you who you can and cannot provide services to. They will be looking for patients who are likely to pay their outstanding bills, not those with low credit scores or delinquent payment histories. Will you be okay with an outside company determining your client list? This is something you’ll need to decide before signing any contracts.
The average factoring contract ranges from two to three years. Depending on your situation, this could add up to a significant extra expense on your balance sheet for a long time. You’ll want to ensure your accounts receivable situation justifies this expense for that length of time. Otherwise, you’re paying for a service you’re not using.
Using a factor isn’t cheap. Most companies charge 1-4% of the total outstanding accounts receivables as well as charging interest on the forwarded amount, and a service fee. The percentage paid and the interest rate are determined by your customers’ history. In other words, you get more money and lower fees if your patients are likely to pay their outstanding bills. You get less cash and higher fees if they’re not likely to pay. You can get assessed a lot fees for a small amount of cash very easily.
Accounts receivable loans can be a great solution to your cash flow problem. However, as with all business loan products, it needs to be looked into extensively and carefully. It’s worth consulting an experienced business financing expert at UCS before incorporating it into your practice.
You went into the medical field to practice medicine, not to worry about cash flow and delinquent accounts receivable. There are numerous solutions to keeping your practice viable and healthy. Receivables factoring is one of those options. If you’d like help discerning if it’s right for you, call our experts. You can reach them by phone at 855-933-8638 or you can use our Live Chat feature on our website. We look forward to helping you.