Medical receivable factoring is the process by which a medical practice or other healthcare entity sells to a finance company at a prearranged discount its accounts for which it is owed money by third-party payers for rendered services. By factoring, the medical entity avoids the time and expense of collecting on the debts and receives cash immediately with which it can pay its bills, invest, expand, or purchase needed equipment and supplies. Careful analysis of the cash flow of the company and projected needs for money on an ongoing or temporary basis determine whether factoring makes sense for a business. Business owners who are contemplating medical receivable factoring must weigh the advantages and disadvantages of factoring against those of collecting the debts in house, obtaining a bank loan, or obtaining a cash advance from a finance company with the accounts receivable as collateral. Finally, the business owner must research the different finance companies and negotiate the most favorable terms for advance payments, discount rates, and fees for the factoring.
Typical third-party payers, such as Medicare, Medicaid, and commercial insurance companies, take as much as 90 days to process medical claims and disburse payments. Medical businesses that have variable cash flows either must maintain a sufficient cash balance on hand to cover the periods of low cash inflow or use practices such as medical receivable factoring to cover shortfalls in cash. Factoring companies will often purchase medical receivables accounts for 95 to 98 percent of their face value minus the factoring fees and insurance write-offs, with 60 to 90 percent of the cash paid within 48 hours and the remaining 10 to 40 percent minus the 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 U.S. Dollars (USD) worth of accounts to a factor for $98,000 USD, of which he receives $58,800 USD immediately and the reserve balance about 60 days later, when the company has collected on all of the accounts. The finance company or factor subtracts its fees from the reserve balance. Depending on the terms of the medical receivable factoring agreement, it may also deduct any uncollectible portions of the accounts.
Medical receivable factoring differs from bank loans in that factoring companies primarily focus on the creditworthiness of the third-party payers from which it will recover its funds versus that of the medical entity. This makes factoring an attractive option when a medical establishment is not on sound financial footing or is newly started. While bank loans require the payment of interest, the medical entity pays no interest on the money that it is advanced by a factor. A factoring arrangement can be obtained within a week, whereas bank loans may take several months. Bank loans are less expensive than medical receivable factoring, and if the company can wait for a loan, it will incur a lower total cost of funds through a bank loan, particularly when the costs of doing business and the income produced offer a slim profit margin.