Medical Factoring Article: How To Finance Your Growing Medical Business
Although many experts speak of gloom and doom in the healthcare industry, the fact is that the industry keeps growing by leaps and bounds. Every year, the demand for medical services, hospitals, healthcare services, medical testing (e.g. MRI Centers, testing centers, etc.) and medical supplies keeps getting stronger. Of course, this trend is expected to continue as the population ages.
However, even though the growth trend looks good, running a medically related business keeps getting more and more challenging. In the past, doctors and medical suppliers could expect to get large and quick reimbursements for their services. Cash flow was reasonably easy to manage. However, Medicare, Medicaid and 3rd party insurance companies have put in place strict compensation guidelines. These guidelines can be summarized in two simple points: you can look to receive less money than before and you should be prepared to wait longer to get paid.
This creates a financial “perfect storm” for healthcare companies. On one hand, you are getting paid less and waiting longer for your money. On the other hand, your operating expenses remain the same or perhaps are higher. You still need to pay your employees, your rent and your suppliers. In almost all cases, this limits your ability to pursue new opportunities and grow your business. In some cases, it may even threaten your ability to continue to operate your business.
Is there a way to “fix” the cash flow problem?
If your business’s main problem is not being able to afford to wait 30 to 90 days to get paid by insurance companies and Medicare, then factoring your invoices could be the right solution for you.
The medical factoring proposition is very simple. Invoice factoring is a way of financing, in which a factoring company provides you with advance payments based on your outstanding accounts receivable (or invoices). You get funding as soon as you invoice. The factoring funds it and waits to get paid until the insurance companies or Medicare pay the invoices.
Medical receivables factoring has advantages over loans and lines of credit. First, factoring financing lines do not have arbitrary limits. The maximum amount of monthly financing is solely determined by your ability to invoice. If your business grows, your financing grows automatically. Also, factoring companies don’t require the same collateral that banks do, so new businesses or doctors’ offices can usually qualify easily.
How does medical receivables factoring work?
The process is fairly simple. Once an agreement is established with a factoring company, it works as follows:
- Your office submits your weekly (daily or monthly) billings to the insurance company and to Medicare/Medicaid. (note: sometimes this task can be handled by the factor on your behalf)
- Your office sends a copy of the billings to the factoring company.
- The factoring company advances you up to 85% of Net Collectables within 48 hours. Funds are sent by wire or direct deposit. The remaining 15% is called a “reserve” and used to settle billing discrepancies at time of payment. This is returned to you once the invoices are paid.
- The factoring company waits to be paid by the insurance company or Medicare/Medicaid.
- Once the factoring company is paid, they settle out the transaction and rebate you the remaining 15%, less their fee.
The advantage of medical receivables factoring
Factoring is ideally suited for medical offices and testing centers that are growing quickly and cannot afford to wait the usual 30 to 90 days that it takes to be paid by insurance companies or Medicare. It can provide you with ongoing financing, streamline your cash flow, and most of all, relieve the stress of not knowing when you’ll be paid.
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