Medical receivables factoring allows healthcare entities to sell their accounts receivable to finance companies at a discounted rate, receiving immediate cash to cover expenses. Factoring fees range from 1-4% per invoice per month, and the process can be completed within a week. It is a viable option for businesses with fluctuating cash flows or weak financial footing.
Factoring for medical receivables is the process by which a medical practice or other healthcare entity sells to a finance company at a pre-agreed discount on its accounts for which it is owed by third-party payers for services rendered. By factoring, the medical entity avoids the time and expense of debt collection and receives immediate cash with which it can pay its bills, invest, expand, or purchase necessary equipment and supplies. A careful analysis of a company’s cash flow and anticipated cash needs on an ongoing or temporary basis determine whether factoring makes sense for a business. Entrepreneurs who are considering medical receivables factoring should weigh the advantages and disadvantages of factoring against those related to collecting internal debts, obtaining a bank loan, or obtaining a cash advance from a finance company with credits as collateral. Finally, the business owner must research the different finance companies and negotiate the most favorable terms for upfront payments, discount rates, and factoring fees.
Typical third-party payers, such as Medicare, Medicaid, and commercial insurance companies, take up to 90 days to process claims and pay payments. Medical businesses that have fluctuating cash flows must either maintain a cash balance sufficient to cover periods of low cash inflow or use practices such as medical receivables factoring to cover cash shortfalls. Factoring firms often purchase medical accounts payable at 95 to 98 percent of their face value less factoring fees and insurance write-offs, with 60 to 90 percent of cash paid within 48 hours and the remaining 10 to 40 percent less fees paid after the finance company collects the money.
Factoring fees range from 1 to 4% per invoice per month. For example, a company may sell $100,000 of United States Dollars (USD) worth $98,000 USD, of which it immediately receives $58,800 USD and the reserve balance approximately 60 days later when the company has collected on all accounts. The finance company or factor deducts its fees from the reserve balance. Depending on the terms of the medical receivables factoring agreement, it may also deduct any bad portions of the accounts.
Factoring for medical receivables differs from bank loans in that factoring companies focus primarily on the creditworthiness of the third party payers from whom you will be recovering your funds as opposed to those of the medical entity. This makes factoring an attractive option when a medical institution doesn’t have a strong financial footing or is just getting started. While bank loans require interest payments, the medical entity pays no interest on the money that is advanced by a factor. A factoring deal can be obtained within a week, while bank loans can take several months. Bank loans are less expensive than factoring for medical receivables and if the company can wait on a loan, this will result in a lower total cost of funds through a bank loan, particularly when management costs and income yield offer a profit margin reduced .
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