Medical receivables factoring involves selling medical bills to a finance company at a discount for immediate cash, avoiding the time and expense of debt collection. Factoring fees range from 1-4% per invoice per month, and factoring companies focus on the creditworthiness of third-party payers. Bank loans are less expensive but take longer to obtain.
Medical receivables factoring is the process by which a medical practice or other healthcare entity sells to a finance company, at a pre-arranged discount, its bills for which it is owed cash by third-party payers for services rendered. By factoring, the medical entity avoids the time and expense of debt collection and immediately receives cash with which it can pay its bills, invest, expand or purchase necessary equipment and supplies. Careful analysis of the company’s cash flow and projected cash needs on an ongoing or temporary basis determines whether factorial makes good business sense. Business owners who are contemplating medical billing receivables should weigh the advantages and disadvantages of billing against in-house billing, getting a bank loan, or getting a cash advance from a finance company with the accounts receivable as collateral. Finally, the business owner should research the different finance companies and negotiate the most favorable terms for advance payments, discount rates, and fees for factoring.
Typical third-party payers such as Medicare, Medicaid, and commercial insurance companies take up to 90 days to process medical claims and disburse payments. Medical businesses that have variable cash flows must maintain a sufficient cash balance on hand to cover periods of low cash inflow or use practices such as invoicing medical receivables to cover cash shortfalls. Factoring companies often purchase medical receivables accounts for 95 to 98% of their face value less factoring fees and insurance write-offs, with 60 to 90% of the money paid within 48 hours and the remaining 10 to 40% less fees. paid after the finance company collects the money.
Factoring fees range from one to four percent per invoice per month. For example, a company may sell $100,000 worth of accounts at a factor of $98,000, of which it receives $58,800 immediately and the reserve balance about 60 days later, when the company is billed on all accounts. The company or finance factor subtracts its fees from the reserve balance. Depending on the terms of the medical receivables factoring agreement, he may also deduct any uncollectible portion of the bills.
Medical receivables factoring differs from bank loans in that factoring companies focus primarily on the creditworthiness of the third-party payers from whom you will recover your funds compared to the medical entity. This makes factoring an attractive option when a medical establishment is not in sound financial condition or is newly started. Although bank loans require interest to be paid, the medical entity does not pay interest on the money 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 billing medical receivables, and if the company can wait for a loan, it will have a lower total cost through a bank loan, particularly when the costs of doing business and the income generated offer a reduced profit margin.
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