Factoring is when a business sells their accounts receivable to a financing company in exchange for immediate working capital. With regards to medical factoring, a financing company advances a certain amount to a healthcare provider in exchange for their accounts receivable for their medical services provided to patients. A patient would then make payments directly to the finance company. This can help relieve healthcare providers of cash flow issues due to outstanding invoices.
How Medical Factoring Works
Once a healthcare provider performs a medical service to a patient, the provider may sell the account receivable associated with that treatment to a finance company. This finance company will verify the invoices. Then, they will send the healthcare provider an advance of 70-90% of the total value of the invoice. Once verified, a letter will be sent to the patient indicating their account has been purchased and payments will be made directly to them. This letter will also include the benefits of the arrangement and will be signed by both the factoring company and the healthcare provider.
Finally, when the entire invoice has been paid by the patient, the factoring company will send the healthcare provider the remaining balance minus a small factoring fee. Fees and terms of a medical factoring agreement vary depending on the lender, size of the facility, and the creditworthiness of the insurance providers. A typical factor fee can range from 1% to 5% of the total invoice amount.
The Benefits of Medical Factoring
- The time for waiting for invoices to be paid is shortened
- The healthcare provider may access working capital quicker than having to wait for slow-paying customers.
- This type of financing is flexible
- Medical financing is offered to a large variety of programs including medical offices, hospitals, nursing homes, surgery facilities, medical staffing agencies, pharmacies, and more.
- A healthcare provider may choose which invoices to fund
- Medical factoring is not a loan and does not incur interest
Types of Medical Factoring
Medical factoring includes two different types of factoring which include medical invoice factoring and healthcare invoice factoring. Medical invoice factoring is used specifically by health-related providers that tend to rely on insurance claims. It addresses the needs of providers that directly care for patients such as dentists, physicians, medical specialists, and more. Healthcare invoice factoring is for service providers that offer their services to healthcare facilities. This may include IT companies, medical staffing agencies, medical supply companies, and more.
Furthermore, when working with any type of factoring, there are two methods that may be used, recourse or non-recourse factoring. Recourse factoring places the risks of non-payment on the healthcare provider. This type of factoring is generally cheaper than non-recourse since the healthcare provider would be responsible for paying back any uncollected invoices. On the other hand, non-recourse factoring places the risk of non-payment on the factoring company itself.
Qualifying for Medical Factoring
Qualifying for medical factoring is typically easier than qualifying for a traditional bank loan. A finance company may require the invoices to be less than 90 days old and a completed claim. The healthcare provider must work with Medicare or Medicaid, HMOs, insurances, etc. Credit score is not a qualifying factor. However, a finance company will typically require the provider to have no outstanding tax balance(s) or unresolved bankruptcy(ies).