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Written by Kent Harlan, CPA
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 Today's medical provider must consistently have an adequate amount of working capital on hand to be able to meet current obligations and to grow the practice. A serious problem that hinders the cash flow of a healthcare provider is the amount of time the provider must wait for insurance companies and other third party payers to reimburse the practice for services rendered.
Medical receivables factoring can be a valuable tool in providing a stable flow of cash that allows the medical practice to pay its bills on time and increase staffing during growth periods.
How can a profitable medical practice can be cash poor?
Most of the expenses incurred by a medical practice must be paid in a relatively short time frame. This coupled with the fact that a majority of revenues are derived by third party payers that pay anywhere from 30 to 120 days, a cash squeeze is created. Unless the practice has been able to accumulate a substantial reserve, delinquent payments may result. Even filing electronically with Medicare can constrict cash flow even though they pay typically within two weeks. Another sources of delayed payments are disputes with the billing and incorrect coding. These problems can drag out the collection process for a half year or more.
Why not get a bank line of credit?
Medical professionals, assuming they have good credit, are viewed as excellent credits. Banks usually have no problem loaning money to doctors for medical equipment, acquiring a practice or even consolidating their debt. But when it comes to granting a line of credit collateralized by the receivables of the practice, it's typically not as easy. Medical receivables can be a very complicated piece of collateral because it's not always apparent as to what will ultimately collected by the practice. Because of this unknown variable, banks (who are conservative anyway), tend to be very cautious when granting a line of this nature. If the practice owners don't expect much growth, the bank line may be adequate to maintain a sufficient level of working capital. But if the goal is to grow practice (as most professionals do), a lender who sprecializes in medical receivable financing may be needed.
How can a lender devoted to medical receivables financing can provide unlimited capital?
Medical receivable factoring companies know the healthcare business. As a result, they are able to provide the maximum advance rate on medical receivables relative to the practice's situation. These companies usually grant anywhere from 75% to 85% of the net collectible value of the invoices in cash. The funds are immediately wired to the provider, which can be used for any purpose. The practice manager can submit invoices daily, weekly, monthly, or any combination of times to the factoring company for payment. Rather than be restricted by a "line", this type of funding provides the amount of capital that is only limited by the medical provider's pool of receivables.
What is the process of establishing a medical receivables factoring relationship?- Fill out a simple application.
- Receive a letter of intent (LOI) from the factoring company which spells out the proposed advance rate, fees, and other terms.
- Provider agrees to the terms by signing the LOI and sends a check for the due diligence audit to the factoring company. A due diligence review is critical because it determines the average net collectible amount of the receivables. It also discloses any billing irregularities and errors. In many cases, the amount of savings by correcting the errors exceeds the cost of the audit.
- A contract is executed between the medical practice and the factoring company that formally discloses all terms of the agreement.
- Invoices are submitted to the factor and funds are wired to the provider's bank account usually within 24 hours.
- Upon collection, the factor remits the reserve amount (actual amount collected minus the advance) less the factoring fee.
As the credit crisis continues to cause banks to restrict their lending parameters, many healthcare providers have turned to finance companies specializing in medical receivables factoring to shore up their working capital needs.
Can medical receivables factoring add needed working capital to your business?
Click here to apply or call today at 417-849-7394. Read other OCF articles related to medical financing.
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