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Top 10 Things to Know About Healthcare Factoring

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By Phil Cohen

Are you navigating the complexities of cash flow in the healthcare sector? Get straight to the heart of healthcare factoring with our top 10 things to know about healthcare factoring – a financial strategy that might be the lifeline your practice needs. From unleashing immediate working capital to understanding the nuances of various factoring agreements, we’ll walk you through the must-knows without the fluff, equipping you with the know-how to make informed decisions for your healthcare practice’s financial health.

1. Understanding Healthcare Factoring

For many, the term ‘healthcare factoring’ might be new. In essence, it’s a financial maneuver that helps healthcare providers manage their cash flow by selling their invoices to a financial institution at a discounted rate. This process, also known as medical receivables financing, provides immediate working capital for healthcare practices struggling with operating expenses. The principal aim is to alleviate cash flow issues by advancing a sum that typically ranges between 80% and 90% of the invoice’s value.

Healthcare factoring is not restricted to a specific segment of the healthcare industry. It can be utilized by healthcare providers and vendors that sell medical goods or services, including those that bill third-party payers such as insurance companies, Medicare, and Medicaid. To get a comprehensive understanding of how this process works and the benefits it offers, let’s delve deeper into the mechanics of healthcare factoring.

2. How Healthcare Factoring Works

Healthcare factoring begins with the selling of unpaid invoices to a factoring company. Once an agreement is signed, the healthcare provider can receive an advance, typically ranging from 80% to 90% of the invoice’s value, from the factoring company. However, not all invoices are eligible for factoring, such as advance payments or subscriptions, hence it’s crucial for healthcare providers to confirm the types of invoices a factoring company will factor and understand how healthcare invoice factoring work.

The specifics of each factoring agreement, such as fees, payment plans, and the initial maximum credit line, dictate the terms of the transaction. Once the client settles an invoice, the factoring company remits any outstanding balance to the provider, deducting their service fee. In this process, the client pays the factor as per the agreed terms.

The speed at which healthcare providers can set up an account and receive initial funding, as well as subsequent payments for new invoice advances, differs among factoring companies, with some able to provide funds within 24 hours after approval.

3. Benefits of Healthcare Factoring

One of the most significant benefits of healthcare factoring is that capital helps healthcare providers by:

  • Providing immediate access to working capital, which is essential for maintaining operations without waiting for customers to pay.
  • Improving cash flow with this ready access to funds, allowing healthcare providers to manage ongoing expenses more effectively.
  • Alleviating financial stress and ensuring timely funds by not having to fret about when customers will pay.

Healthcare factoring offers the following advantages, which is why healthcare factoring is ideal:

  • Frees up time and resources that can be redirected to essential tasks within the healthcare practice
  • Particularly useful when dealing with creditworthy but slow-paying customers
  • Once clients settle their invoices, the remaining balance is received from the factoring company, minus a service fee, finalizing the factoring transaction.

4. Types of Healthcare Providers That Can Benefit

Healthcare factoring is beneficial to two main types of healthcare businesses in the healthcare industry: vendors who supply goods and services to medical facilities and providers that bill third-party medical insurance companies. Several service-oriented healthcare companies within the industry, often referred to as healthcare business, find healthcare factoring particularly advantageous. One such healthcare company includes those offering services like medical transcription, medical supply, medical staffing, temporary nurse registries, outsourced medical coding, and medical billing.

A wide range of medical businesses, including various medical accounts, benefit from factoring, particularly when invoicing third-party payers like Medicaid, Medicare, and private insurance companies. This group of medical companies, operating within the medical industry, consists of:

  • Private practice physicians
  • Durable medical equipment companies
  • Surgery centers
  • Mental health providers
  • Rehabilitation practices
  • Healthcare vendors that bill medical providers, hospitals, nursing homes, or other healthcare facilities

These providers, known as medical factoring companies, use medical factoring to maintain a positive cash flow when facing delayed payments for their services or goods. A reliable medical factoring company can be a valuable partner in ensuring financial stability for healthcare providers.

5. Qualifying for Healthcare Factoring

At PRN Funding, we understand the unique challenges faced by home healthcare providers in managing cash flow and sustaining operations. Qualifying for home healthcare factoring is straightforward and tailored to meet your specific needs. Whether you’re a small agency or a large organization, our flexible qualification criteria ensures accessibility to our factoring services.

To qualify, you simply need to be a home healthcare provider with invoiced services rendered to creditworthy clients. We accept providers of all sizes, including startups and those with less-than-perfect credit. Our team works closely with you to assess your eligibility and customize a factoring solution that aligns with your business goals.

6. Choosing a Factoring Company

Choosing a factoring company is a crucial step, and it’s important to consider several factors. Here are some things to look for:

  • Extensive industry experience
  • A professional team capable of fostering strong relationships
  • Electronically streamlined processes for quicker transactions
  • Fewer unforeseen costs

Transparent factoring terms are essential, aiming for a low rate and high advance rate, balanced with quality customer service. Also, evaluate any extra financial services offered, like inventory borrowing or business loans, and consider client reviews and concentration caps as they may limit capital access.

7. Evaluating Factoring Fees and Costs

When evaluating factoring fees and costs, it’s crucial to consider factors such as associated risk, invoice volume, duration of the recourse period, and the rate of advance given by the factoring company. Factoring rates come in various structures including flat fee, split fee, daily fee, and prime plus, each tailored to different scenarios regarding the timing and amount of payments.

Generally, the amount of cash advanced by the factoring company ranges between 70% to 95% of an invoice’s face value. A higher advance rate may result in increased costs of the factoring service. Additional factoring fees might include:

  • charges for document handling
  • charges for individual transactions
  • non-recourse credit guarantees
  • carrier payments
  • penalties for early termination of the factoring agreement.

Therefore, it’s crucial for healthcare providers to compare factoring fees and costs from different companies, ensuring there are no hidden fees and full transparency regarding their factoring agreement terms.

8. Recourse vs. Non-Recourse Factoring

In the realm of healthcare factoring, two main types of factoring exist: recourse and non-recourse factoring. In recourse factoring, the responsibility of collecting payment on unpaid invoices falls on the healthcare provider, making the company liable if customers default. On the other hand, non-recourse factoring provides protection in case of specific customer defaults such as bankruptcy, with the factoring company assuming the burden of collecting payments.

Non-recourse factoring generally involves higher fees compared to recourse factoring due to the additional risk assumed by the factoring company. Therefore, when choosing between recourse and non-recourse factoring, it’s essential for healthcare providers to consider their ability to buy back uncollected invoices versus transferring the risk of unpaid invoices to the factoring partner.

9. Applying for Healthcare Factoring

The process of applying for healthcare factoring involves:

  • Completing a one-page application or calling the factoring company
  • Providing invoice information along with the amount they wish to sell
  • Providing a list of existing and potential customers
  • Providing business ownership identification
  • Providing personal identification
  • Providing an Employer Identification Number (EIN)
  • Providing relevant corporate paperwork

To assess eligibility, applicants are required to provide all of the above information.

Once the application for healthcare factoring is submitted, a representative contacts the provider to discuss the factoring fee, rate, and terms. If approved, funds are typically received within 1-2 days.

It’s crucial for healthcare providers to thoroughly review the terms of the factoring agreement before finalizing with the factoring company. Key factors to consider include:

  • Repayment schedules
  • Advance rates
  • Type of factoring
  • Cancellation fees
  • Contract length

Taking the time to carefully review these terms will help ensure that the factoring agreement is a good fit for your healthcare practice.

10. Real-Life Examples of Healthcare Factoring Success

To best understand the benefits of healthcare factoring, let’s take a look at some real-life examples of its success. Chastity Williams, for instance, used healthcare factoring to turn her dream into reality by launching a hospice nursing service. Jill, a temporary nurse, was able to establish her own temporary healthcare staffing business with the support of healthcare factoring.

David leveraged healthcare factoring to fulfill his entrepreneurial ambitions and enter the medical billing industry. During a recession, Greg Donnelly employed healthcare factoring to expand a small respiratory staffing company, proving its effectiveness in overcoming economic challenges. These success stories highlight how healthcare factoring can support business growth, launch new healthcare services, and overcome economic challenges.

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Phil Cohen

About the author

Philip Cohen is the founder and President of PRN Funding, LLC. PRN Funding is an extraordinarily focused niche player in healthcare funding. With years of…... Read More

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