Regardless of what industry pundits say, opening a medical practice can be both very rewarding and very lucrative. Of course, as with any business, medical offices have their own specific financial challenges. One of the biggest challenges for medical practices of all sizes is adjusting to the long payment cycles of private insurance providers and Medicare/Medicaid. It is not uncommon for bills to insurance companies to take up to 120 days to pay. This slow payment cycle wreaks havoc in the office’s cash flow, forcing the medical office to carry the costs of doing business – paying rent, equipment leases and office staff – while waiting to get paid. This can be prohibitively expensive and prevent the office from growing and hiring additional staff. At its worst, it can threaten the very existence of the medical practice.

However, there is a light at the end of the tunnel. There is a financing tool that lets you capitalize on your slow paying insurance companies and turn their slow payments into immediate payments. The solution is to factor your medical receivables.

How does medical receivables factoring work?

Medical receivables factoring (or medical factoring for short) is a financing tool that allows you to turn slow paying invoices into actual cash, by selling them to a medical factoring company. The medical factoring company pays you for them and waits to be paid by the insurance companies. It eliminates the slow payment cycle, reducing the payment time from 90 days to two days. This provides the medical office with the necessary funds to meet expenses, such as paying rent and staff. It also frees up capital to grow the business into new areas.

The medical factoring process is fairly simple. Once a factoring arrangement is established, your office sends its weekly receivables to the factoring company for immediate financing. The factoring company will calculate the actual amount paid by insurance companies (called the net collectibles) and advance you up to 80% of that amount. The remaining 20% is called the reserve, and is used to settle billing discrepancies. Once the insurance company pays the medical bill, the remaining 20% is rebated, less the financing fee. The financing fee varies based on how long the invoices were financed.

Although qualifying for factoring is relatively simple, most financing companies will only work with medical offices that have net collectibles of at least $50,000. Terms usually get better as the practice grows. Medical practices, testing centers and medical supply companies that have over $200,000 a month in net collectibles are in the best position to get the best terms. This is because insurance payment processing can be very complex and there are a number of efficiencies that can be realized with high volumes.

Advantages of medical office factoring

Medical office factoring has some advantages over other financial products. The most important is that the financing is recurring and happens every time you invoice an insurance company. This makes it a cash on demand product. As opposed to loans and lines of credit, the factoring line has flexible limits. As a matter of fact, the limits are based on your ability to invoice, making it an ideal growth tool. Lastly, doctor office factoring is easy to qualify for and the personal credit of the practice owners is usually not involved in the financing decision.

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There are few bigger pains for healthcare industry professionals than having to wait 30, 60 or even 120 days to collect payments from insurance companies, HMOs and Medicare/Medicaid. The healthcare industry is riddled with complex billing, coding and processing rules that create very long payment cycles. This can be very difficult for medical offices, testing and diagnostic centers, medical supply companies, or any healthcare related business, for that matter. There are always many ongoing expenses that can’t wait. There is rent that needs to be paid, offices expenses that need to be covered, and payroll that must be met.

This situation creates a problem for most healthcare businesses. On paper, the business may look very profitable and seem to be doing well. But in reality, most of the money is tied up in slow paying invoices (also known as accounts receivable) with little cash to show for it in the bank.

When faced with tight cash flow, most healthcare professionals turn to their bankers. Medical doctors can usually qualify for signature loans or lines of credit. Other business professionals are not so lucky. In reality, a loan or line of credit may help you in the short term, but will not solve the main problem. Why? Well, loans are good for buying equipment or large capital expenditures, but not for covering recurring and ongoing expenses. A line of credit is a better solution, but they usually have fixed limits. What happens if the business grows past the limits of the line of credit? Many healthcare professionals usually find out, the hard way, that the bankers that were quite happy to extend the first loan or line of credit will not be so helpful at increasing it. Unfortunately, bankers absolutely hate it when businesses came back to the well for more money.

If you look at the problem at hand, you will soon realize that the perfect solution should have the following characteristics. First, it should be able to accelerate your insurance payments so that you can get them quickly rather than slowly. Second, the solution should be able to grow with your business. So, if your business grows its billings, the solution should be able to adapt the financing it delivers, seamlessly. Third, the solution should allow you to finance significant growth. Maybe three to five times your current revenues – or more.

There is a solution that meets these criteria and is available to the healthcare industry. The solution is to factor your medical receivables using a financing tool called medical factoring. Medical factoring allows you to accelerate your payments from insurance companies, HMO’s or Medicare/Medicaid. It enables you to receive a substantial amount of your net collectables within days of billing, streamlining your cash flow dramatically.

Medical factoring, a specialty form of general factoring, allows you to sell your claims and receivables to a factoring financing company. The factoring company buys them – at a small discount – and pays you with immediate funds. The factoring company waits to be paid while you get to use the funds to meet business expenses. As opposed to traditional banking financial products, medical factoring has no arbitrary limits. You can factor or sell as much revenue as you can generate, making it the ideal financing tool for growth.

However, factoring is not the best solution for every situation. It works best in instances where your main challenge is that you cannot afford to wait to get paid in 60 to 120 days. It helps you meet ongoing and recurring expenses such as rent, payroll and lease payments. Medical factoring is an ideal solution for medical offices, rehabilitation centers, medical testing and diagnostic centers, medical supply companies and small to mid sized hospitals.

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Although many experts speak of gloom and doom in the medical industry, the fact is that this industry keeps growing by leaps and bounds. Every year, the demand for medical services, medical testing (e.g. MRI Centers, Testing Centers, etc) and medical supplies keeps getting stronger. 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 medical industry 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 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 cash flow 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 factoring proposition is very simple. 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.

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 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 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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