In my previous articles, I’ve explained how medical transcription companies can benefit greatly by selling their receivables to a factor in order to increase their cash availability. Instead of waiting weeks or even months to receive payment for their services, medical transcription services can factor their invoices and get paid within days.
I have also discussed reasons why it’s important to shop around and choose an accounts receivable factor who will best meet your medical transcription funding needs. I went over many different things to consider when choosing a funding company, including its size, location and area of specialty. In addition, I explained some of the general economics to consider (discount fees and advance rates), as well as a range of common additional fees.
In the final part of this series, I will discuss differing terms of contractual agreements and what to compare, variations of the invoicing process and which scenarios would work the best for your medical transcription financing needs. I will also review the various reporting capabilities that factors offer their clients.
As is the case whenever you enter into a legal business relationship with another entity, factoring companies will require that you sign a contract. It’s important that you read through it and be sure to ask questions if you don’t understand something because the contract outlines specific concepts and fees associated with different situations. One big thing to look for in a contract is whether or not the factor has monthly minimums/maximums. For example, some factors will require that you factor at least $50,000/month, which shouldn’t be a problem if you are invoicing over $100,000 every month. Keep in mind that most factors will implement a penalty fee if you do not meet the minimum monthly factoring amount. On the other hand, a smaller factor may not have a minimum amount, but they might have a maximum amount instead. So if a factor says that they can only fund up to $500 thousand in a month, and you know that your company does well over $1 million in sales every month, you will have to keep searching. Again, it all depends on your company’s needs and finding the appropriate factor that can meet those needs.
When looking for a medical transcription funding company, also consider the length of time that you are required to remain in the factoring relationship. Some factors are more accommodating in this area than others, providing you the flexibility to choose how long you want to factor. Still, other factoring companies will require you to sign a term-contract for 12-24 months. If this is the case, the factor will also charge an early termination fee if the contract is broken before the term expires. Every company enters the funding equation at a different point. For example, where one business may only need to factor for a few months to get them through a small cash flow jam, another company may use factoring for years. So it’s important that you take the time to think through how long you plan to factor your receivables, and be sure to consider the type of commitment you are comfortable making. Having an estimated length of time in mind will make it easier for you to find a medical transcription factoring company whose terms are conducive to your business’ needs.
Also included in the contract will be details on the type of guaranty that the factor will require before funding your invoices. Although there are a few factors that will not require a guaranty, the majority of them will want either a personal guaranty, whereby the seller is personally responsible for any unpaid invoices, or a validity guaranty, in which the seller guarantees that all of the invoices that are sold to the factor are valid, were prepared after services were rendered, and that the customer has agreed to pay them.
Finally, it’s necessary for you to understand what the invoicing process will be like after you have chosen your factoring company. A question that I hear frequently is “How soon can I be funded?” The answer to this question can vary from days to weeks or perhaps months. In order to set up a company for its initial funding, a factor requires you to fill out and return legal paperwork, including an application, contract, and a tax information form. In addition, you may be required to send in a current accounts aging report, federal tax returns, copy of your trade name certificate or fictitious name filing, articles of incorporation and bylaws, customer lists, copies of invoices, copies of driver’s license, a copy of a voided check, etc. Because there are legal documents involved and liens have to be filed on your medical transcription receivables, the factor can usually move as quickly as the completed paperwork is received. In most cases, 5-7 business days is the average amount of time it will take to receive your initial funding. From there on, the funding process will most likely speed up to 2-3 business days after you present invoices to the factor. There are some factors that can deliver same-day funds via a wire transaction, but just be aware of the fact that there will be fees associated with the amount of time it takes for you to receive funds into your account. For example, a same-day wire transaction will often cost you more than an overnight ACH transaction.
Another topic involved with the entire funding process is what’s known as the “reserve account.” Reserve is the percentage of an invoice amount that the factor will hold onto until it receives payment from your customers. This reserve amount will eventually be released back to you once your invoices have been paid and the factor has collected its fees. For example, let’s say that you have an 80 percent advance rate and 20 percent is held for reserve. Let’s also say that your invoices were paid within 30 days, translating into a three percent discount fee. The initial 20 percent minus the three percent discount fee equals 17 percent, which is due back to you. Some factors will have automatic reserve releases weekly, some every other week or some monthly. Then there are some factors who will not release the reserve unless it is specifically requested by their client. Finding out when your reserve will be released back to you is an excellent question to ask a factor because it determines how soon you can have access to additional money to invest back into your business.
You also want to consider whether or not you want a factor to handle all of your back office services including billing, collections, issuing payroll, etc. Some factors will do a portion of the back office services and some will only act as a funder. Just remember that if you choose a factor that is willing to do all of your back office services in addition to funding, there will most likely be extra fees associated with the extra work. You may prefer to hand the entire billing and collecting process over to a factor so that you can focus your efforts on other areas of growing your business. Or you might want to work with a factor that will process and mail your invoices in addition to collecting while you continue to run the company’s payroll in-house. Perhaps, you would feel the most in control if you continue to invoice and collect and do your own payroll in-house. Whichever you choose, there will be a factor out there that is with the best fit for you.
Finally, the last thing that you should look for when choosing a factor is if you have access to financial reports concerning your clients’ payments. Most factors keep a detailed account of your customers’ payments. Just because the factor runs these reports for his/her own knowledge does not necessarily mean that they will share them with you. Some factors will provide you with weekly/monthly reports via e-mail or snail mail, and some factors can provide you with real-time reporting. This means that as soon as a payment is posted to your account, you can view it online and see the same screen that the factor sees. Having access to these reports is a good way for you to learn more about your customers. For example, if you notice that one of your client’s invoices is approaching 60 days, and you don’t want to have to pay the fees for those extra days, you could call that client and try to get the invoice paid sooner. Or if your factoring company handles your collections, you could also call them up and request that they work their collections on that particular account harder. Whichever way you choose to address the situation is completely up to you, but also keep in mind that having the option to view the reports in the first place is an important one.
In its entirety, these articles have addressed multiple ways to help you find the right factor for your business. Like I stated at the beginning of this series, there are thousands of factors out there, each with their own advantages and disadvantages. So it’s extremely important to look at the all-encompassing package of what each factor has to offer before you make your final decision. The best thing to do is to ask questions and listen for the answers that will best suit your medical transcription invoice factoring needs.