Case Study: An Arizona Medical Transcription Services Company
When an Arizona medical transcription service owner (MTSO) signed three new clients, things got a little hectic at the office. As a business owner, she was ecstatic about the new business and the growth opportunities it provided, but in order to meet these new demands, she would have to increase the size of her dictation system, have interfaces built, and recruit, hire and train new employees. She was going to incur meaningful start-up costs and her on-going expenses (mainly payroll and taxes) were going to increase tremendously. Meanwhile, it would be many weeks before her new clients would pay her for her work.
The president was now faced with a dilemma, despite her anticipated business growth. Instead of immediately launching into her new contracts, she would first need to spend the next couple of weeks looking for capital. This way she would be completely prepared to meet the demands of her new clients. Having already exhausted her ability to borrow from the bank, she instead went to a medical transcription accounts receivable factor for the money she desired. With the ability to use the receivables from her new clients as collateral, she would be able to quickly secure the cash needed to meet the expectations of these new clients.
But what exactly can a factoring company do for a medical transcription service? And how common, and more importantly, how wise is it to do business with this kind of finance provider?
What is Factoring?
Factoring works similarly to the use of the credit card. The factor provides capital in one of two ways: either by purchasing the asset value of a receivable (non-recourse) or by making a loan with the invoices as collateral (full-recourse). In the case of medical transcription funding, the factoring company buys the value of the receivables and takes the credit risk that the invoice will be paid. The client still retains the performance warranty on the work done for a customer. Before the factor decides to purchase the accounts receivable, the factor performs a thorough credit check on the customer. If a factor makes a loan against an invoice, which usually occurs when the customer credit is not favorable, its client will continue to assume their credit risk, and will also be liable for any non-payments.
When a prospect applies for a loan from a bank without having an adequate credit record or a profitable business history, it is not uncommon for the bank to recommend a factor since the prospect is not in the position to pursue conventional financing. The factoring firm can help provide the financial discipline that a prospect needs as well as the opportunity to secure short-term working capital. Banks often see factoring as an interim solution to inadequate credit, until the client is in a better position to secure a bank loan.
A good factor wants to see its client eventually move to a conventional banking relationship and avoids companies that would depend on them forever. Any company that cannot establish an exemplary credit history can eventually become a bad risk for any financial partner. Factors are as unlikely as any financial institution to invest money, and even time, into a risky company.
Utilizing a Factoring Company
There is often a misconception that the only time to use a medical transcription funding option is when the company is going out of business, when, in fact, the complete opposite is true. Factors will research a prospect thoroughly before deciding to accept them or not. Since the factor will operate as a de facto partner or investor by assuming the risk of the company’s receivables, it is in the interest of the factor to take on clients that are growing, solvent, and ambitious. A factoring company’s ideal partnership would be with a new or reorganized company looking at a bright future ahead of them. Factors want to work with companies that are in the growth mode.
Until recently, working with a factor was thought to be a sign that the company was hitting rock-bottom due to financial troubles and viewed as the last line in a shaky financial defense for a business. This perception of factoring persisted largely because of the unregulated status of the factoring industry. Now, factors are shaking off that bad reputation because the shady players are being sorted out through a combination of competition and sound operating procedures. Factors watch each other closely and constantly interact, often providing assistance to one another as banks do, which in turn means better service to their clients.
Although account receivable factoring companies take on businesses that are unable to turn to banks, they will not take on every single company that asks for assistance. In order to establish the most effective business relationship with their clients, factors become experts in their clients’ business and industry, for example dealing with only medical or only construction receivables.
Working With a Medical Transcription Factoring Company
It is vital that you work with a medical transcription factoring company that has a thorough understanding of you and your business plan. Since most factors are picky about their clientele a smart MTSO should be wary of any factor that gives the impression that they are willing to do business with just about everyone.
It is rather rare to find two different factoring companies that operate exactly alike. Each factor has its own methods for running the business, sorting out credit issues, notifying a client’s customers, and verifying that the invoices are real and collectable. Generally, the factor discounts the full face value of an invoice by a certain percentage. Rates are most times determined by the risk and the volume of the invoices. Low volume, measured in dollars per month financed, is usually more expensive. If a client guarantees that it will need factoring for a specific amount of time or money, the rate can also be lowered for the client. Some factors may provide annual APR rates, which are tied to the amount of financing outstanding, while other factors will simply discount invoiced amounts.
There are definitely unique benefits to medical transcription factoring, and even the hardcore skeptics will admit to the benefits. The first of which is equity, which remains unchanged on the company balance sheet even when deals with a factor are struck. As opposed to a conventional bank loan or credit line, the factoring relationship does not appear as a liability on the business’ books. Also with a factoring company, it only takes a few days from the time your start the application process to the time you receive capital. For companies battling a cash flow crunch (such as a growing medical transcription service), the immediacy of potential capital is often the dealmaker. High-growth companies benefit from the factor’s flexibility. Rather than operating with a fixed line of credit, a factoring firm’s credit line can be expected to grow as their clients’ billings increase.
The World Wide Web makes it even more convenient for factoring companies to effectively provide account information to their clients. Some factors offer online services that enable their clients to view their key factoring reports over the Internet. With the use of this service, clients are able to check the status of their accounts at any time from any computer that has Internet access. This makes it easier for clients to keep a detailed tracking of their accounts receivable, giving them the freedom to focus their attention on growing their businesses.
Factors that offer an online service must ensure that the factoring reports can only be accessed with the highest level of security, manageability, and privacy for their clients. Factoring companies must also update client reports on a regular basis so that clients are able to view their most recent account data. The online reporting can help factoring companies serve their clients more efficiently by making their financial information conveniently available on a daily basis. This quick and easy access to factoring reports can help answer any questions that clients may have about their accounts receivables.
Just like the MTSO in this article, when an established company experiences cash flow problems due to some new, large accounts, medical transcription accounts receivable factoring can be the best solution to solve their problems. Rather than going through a total re-application of its bank line, the company can use a factor for short-term working capital until the new accounts become self-financing. The company may be surprised at how quick and painless the whole process can be by using a factor.
The flexibility that a factor can offer is one of the highest regarded aspects of the factoring business. Compared with the usually rigid practices of both your neighborhood and downtown bank, a factor can be just the fresh opportunity a medical transcription business needs to boom.
Understanding Medical Transcription Services in the Healthcare Industry
Medical transcription services play a vital role in the healthcare industry, providing accurate and timely documentation of patient information. These services involve the conversion of dictated recordings from healthcare providers into written text, which is then used to create electronic medical records (EMRs). Medical transcription services are essential for healthcare providers, as they enable the efficient and accurate documentation of patient care, diagnosis, and treatment.
In the healthcare industry, medical transcription services are used by various healthcare providers, including hospitals, clinics, and private practices. These services are typically outsourced to specialized medical transcription companies, which employ trained medical transcriptionists to transcribe the dictated recordings. The transcribed documents are then reviewed and edited for accuracy and quality assurance before being returned to the healthcare provider. This meticulous process ensures that the documentation is precise and reliable, which is crucial for maintaining high standards of patient care.
Challenges and Financial Strains
Despite the importance of medical transcription services, many healthcare providers face challenges and financial strains in maintaining accurate and timely documentation. One of the primary challenges is the high cost of employing and training medical transcriptionists, which can be a significant burden for small and medium-sized healthcare providers. The specialized skills required for medical transcription mean that hiring qualified professionals can be expensive, and ongoing training is necessary to keep up with industry standards and technological advancements.
Additionally, the increasing demand for electronic medical records (EMRs) has put pressure on healthcare providers to invest in technology and infrastructure to support digital documentation. This can be a significant financial strain, particularly for smaller healthcare providers with limited resources. The costs associated with upgrading systems, purchasing new software, and ensuring data security can add up quickly, making it difficult for these providers to manage their budgets effectively.
Alternative Financing Options
To address these financial challenges, healthcare providers are exploring alternative financing options to support their medical transcription needs. One such option is invoice factoring, which allows healthcare providers to sell their outstanding invoices to a third-party financier in exchange for immediate cash. This can be a game-changer for healthcare providers struggling with cash flow issues.
Invoice factoring can provide healthcare providers with the necessary funds to invest in technology and infrastructure, as well as to employ and train medical transcriptionists. This financing option can also help healthcare providers to improve their cash flow, reduce debt, and increase their financial stability. By converting receivables into immediate cash, healthcare providers can ensure they have the resources needed to maintain high-quality transcription services without compromising other areas of their operations.
How Factoring Works
Invoice factoring is a simple and straightforward process that involves the sale of outstanding invoices to a third-party financier. Here’s how it works:
The healthcare provider submits an invoice to the factoring company.
The factoring company verifies the invoice and advances a percentage of the invoice value to the healthcare provider.
The factoring company collects payment from the client (e.g., insurance company or patient).
The factoring company deducts its fee and returns the remaining balance to the healthcare provider.
This process allows healthcare providers to access funds quickly, without waiting for the usual payment cycles. The immediate cash flow can be used to cover operational costs, invest in new technology, or expand services, providing a significant boost to the healthcare provider’s financial health.
Benefits of Factoring
Invoice factoring offers several benefits to healthcare providers, including:
Improved cash flow: Factoring provides immediate access to cash, which can be used to invest in technology, infrastructure, and staffing.
Reduced debt: By selling outstanding invoices, healthcare providers can reduce their debt and improve their financial stability.
Increased financial stability: Factoring can help healthcare providers to manage their finances more effectively, reducing the risk of financial instability.
Value proposition: Factoring can provide healthcare providers with a competitive advantage, enabling them to offer high-quality medical transcription services to their clients.
By understanding the benefits of invoice factoring, healthcare providers can make informed decisions about their financing options and improve their financial stability. This can lead to better service delivery, enhanced patient care, and a stronger position in the competitive healthcare industry.
