Everything To Know About Medical Factoring

Updated on July 30, 2020

No matter the specific division, running a healthcare business is no mean feat. You not only have to care for the needs of your patients, but also have to consistently fund crucial parts of your operation. If you fail at either aspect, it automatically destabilizes the other side of the picture. 

This is a massive challenge on its own. But it can get even more difficult when you have to face unpaid invoices by your patients. Sometimes, the 30-120 day limit to receive your payments seems too long for comfort, and renders you unable to meet your operational expenses. 

That’s where medical factoring comes in.

By factoring receivables through reliable avenues, your healthcare business can maintain a consistent cash flow despite unpaid invoices. This saves your facility from jeopardy and allows you to continue serving your patients or clients without interruption.

To learn how medical factoring works and what does it mean for your healthcare facility, here’s a lowdown on this specialized financing mechanism.

What is Medical Factoring?

Medical factoring refers to a type of capital financing for the healthcare industry. But instead of conventional capital that is related to business plans, this financing is directly tied to unpaid medical invoices. 

By turning to medical factoring, hospitals and other healthcare operations can get significant coverage for invoices that are not immediately fulfilled by patients. As a result, these healthcare businesses can maintain a stable cash flow despite delays in payment from their direct clients.

Medical factoring can be equally effective for healthcare businesses that have recently started their operations, as well as facilities that have established their stature in their respective communities. 

It is also equally helpful to vendors that deliver critical healthcare services as well as providers that offer direct care to patients. To clarify: Vendors can include businesses such as transportation, staffing, or equipment; while providers include doctors, physicians, and other healthcare professionals.

This makes factoring receivables a popular financing mechanism that is highly sought after by businesses in various medical divisions. Since both new and old healthcare entities can face the problem of unpaid bills, medical factoring is often an integral part of their risk mitigation strategy. 

Whether your healthcare facility is under financial struggle right after starting its operations or needs a reliable support system after years of running a well-oiled machine, medical factoring can help you get out of dead-ends with ease.

Who Funds Medical Factoring?

Medical factoring is supported by external companies that provide funding to healthcare businesses including but not limited to hospitals, clinics, and staffing companies. These specialized financing firms take in applications from interested businesses, and decide whether the entity is a suitable fit for them. 

Factoring firms then take some time to fulfill key processes before buying your invoices. These companies deliver this service in return for certain fees and charges, which is how they make their profit. 

Due to this niche approach, medical factoring companies stand apart from traditional investors who operate within the healthcare industry. Since not many investment entities deal in this division, medical factoring companies also remain a significantly smaller segment than general healthcare financers. 

But if your healthcare business finds a specialized factoring company that is a good match for you, the collaboration can work wonders in helping you scale your operations. 

With minimal worries in the financing department, you can fund your critical needs without having to wait for patients to pay their invoices. This helps you stay on top of your business plans and even lets you expand your solutions in a timely manner.

How Does Medical Factoring Work?

Factoring receivables is not exclusive to the healthcare sector. Businesses from different industries often sell their invoicesto get cash payments against the billable amount. Medical factoring works on a similar mechanism.

When you reach out to a medical factoring company, the firm often goes through related details such as your business operations, regular finances, and patient credit checks. Once the firm deems your business sufficient for factoring, you can sell your invoices to it. 

Typically, you can receive up to 80 percent of your total invoice value in cash. The remaining 20 percent is delivered after your patients or clients have made their payments and the factoring company has deducted its service fees and other charges from it. 

In order to maintain transparency of operations, medical factoring companies are upfront about these fees and charges. This makes sure that you are not caught by surprise and know about the expected costs of availing the factoring service. 

With the help of financial technology, some of these firms also operate their services in a digital capacity. This ensures that you don’t have to run from one physical office to another in order to fulfill your financing request. 

Medical Factoring Comes With a Few Stipulations

Since medical factoring is a specialized field of financing, it is important to understand the nuances that come with it. This knowledge helps you prepare for what to expect while dealing with a medical factoring company. It also allows you to make informed decisions.

Sold Invoices Are Paid to the Factoring Company

Once you sell your invoices to a medical factoring firm, the company becomes responsible for their recovery. As such, any payments that are made by your patients or clients are directed to the factoring company. This allows the firm to deduct its charges upon full payment before distributing the remaining amount to you. At the same time, it sets you free from the worry of having to chase your patients or clients for payments.

The Payable Cash Value is Not Set in Stone

The upfront cash value that is payable against sold invoices is 80 percent. But this ratio is not set in stone. It can also go higher and provide you with up to 90 percent of invoice value in upfront cash amount. This aspect completely depends upon the factoring company and related circumstances. This makes it important for you to shop around and get the best terms against your factoring request.

It Has Its Own Line of Credit

When you are factoring receivables, it does not mean that all your invoices are paid in cash to an unlimited value. The maximum amount that you can receive depends upon your factoring company and the line of credit that it assigns to your healthcare business. You can only sell your invoices to the limit defined in this line of credit that is defined by the factoring company. While this limits your receivables, it also creates more transparency in the process.

The Processing Time Can Vary

The whole point of turning to medical factoring is to speed up the process of receiving cash against your paid invoices. Keeping this in mind, all reliable medical factoring companies process these requests within a few days of the initial application. However, some can even fulfill them within a few hours. It all depends upon the factoring company you choose, the type of services it offers, and how frequently you use its services.

Medical Factoring Lets You Run Your Operations Optimally

Apart from letting you find a timely solution to the 30-120 day invoice period, medical factoring delivers additional benefits for your healthcare operation. 

Ability to Finance Infrastructure

By having a continuous cash flow, you are able to fund your critical infrastructure expenses including but not limited to premises rent and taxes; equipment upgrades and replacements; as well as constructional renovations and upgrades.

Protection for Legal Costs

While running a healthcare business, you need to be prepared to fight against a myriad of operational risks such as malpractice suits. This also means having significant funds tucked away for such coverage. Medical factoring helps you keep these funds untouched and helps you keep your operations running in the case of any potential legal challenges.

Uninterrupted Payroll for Staff

Factoring receivables also allows you to disburse your staff payroll even in the face of unpaid invoices by patients and clients. This ensures that you don’t have to experience high employee turnover or any damage to your reputation. 

Continued Services for Patients and Clients

Being able to fund all of these crucial aspects ensures that you are providing consistent services to your patients and clients. This makes sure that you don’t have to turn away anyone who needs your services. 

It Provides Better Terms Than a Typical Loan

Since medical factoring is not a loan but a service, its terms, pricing, and features are typically better than a conventional lending solution. This makes factoring superior to loans and similar lending products.

Using Factoring Wisely Can Help You Scale Your Operations

Overall, medical factoring can be a helpful solution for keeping your healthcare operations afloat. With faster turnaround times and robust cash assistance, it can help you sustain your business amid massive financial challenges.

The key is to find a reliable medical factoring solution to help you through difficult times. As long as you find a firm that is known for being trustworthy, transparent, and helpful to its customers, you can reap all the benefits of medical factoring in a stress-free way. 

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Throughout the year, our writers feature fresh, in-depth, and relevant information for our audience of 40,000+ healthcare leaders and professionals. As a healthcare business publication, we cover and cherish our relationship with the entire health care industry including administrators, nurses, physicians, physical therapists, pharmacists, and more. We cover a broad spectrum from hospitals to medical offices to outpatient services to eye surgery centers to university settings. We focus on rehabilitation, nursing homes, home care, hospice as well as men’s health, women’s heath, and pediatrics.