The opportunity cost of Accounts Receivable sitting on a healthcare organization’s books rather than working for the organization in the form of cash can be high. Turning your organization’s non-liquid assets into cash allows it focus on service while maintaining financial prudence. As discussed in previous blogs (Accounts Receivable Financing or Asset-Based Lending) there are many ways to turn accounts receivable into cash. Medical Receivables Factoring is one of the ways.
Definitionally, Medical Receivables Factoring is “the selling of a medical company’s accounts receivable, at a discount, to a factor, who then assumes the risk of the account debtors and receives cash as the debtors settle their accounts.” In a factoring arrangement, the lender becomes the main point of contact for collections. What this means for your organization is that the burden of collection is no longer yours, yet the cash from the services offered are available immediately for use.
How Medical Receivables Factoring Works
1) The factor company purchases trade accounts receivable (invoices) for up to 85% cash immediately. The title to the accounts receivable then pass to the factor company who then begins collection of the invoice.
2) Upon collection of the invoice, the remaining value of the invoice less a fee is delivered to the client. The fee is usually 3%-5% for invoices collected within 30 days, and 1.5%-2.5% for each 15 days thereafter.
While the fee and advance amounts are subject to the individual agreement, the way medical receivables factoring works allows a healthcare organization to essentially outsource its collection department and turn receivables into cash immediately.
Differences between Factoring and Traditional Asset-Based Lending
Other forms of asset-based lending include using assets such as equipment, inventory, and purchase orders to secure loans. While these are effective ways to leverage your assets for cash, it is helpful to look at the differences between traditional forms of asset-based lending and factoring.
|Asset-Based Lending||Accounts Receivable Factoring|
|Good Financial Statements Required||No Financial Statements Required|
|Two Years TIB Minumum||No Minimum TIB|
|Good FICO Score Required||FICO Not considered|
|Personal Guarantees Required||No Personal Guarantees|
|Prime Plus 2-6%||3% for 30 days, 1% each 10 days after|
|60-90 day closing time||3-7 day closing time|
Medical Receivables Factoring provides Credit Protection
Since Medical Receivables Factoring is non-recourse, client healthcare organizations do not need to worry about bad debt; once receivables are sold, the credit risk is transferred to the lending factor. Using sophisticated credit tools, the lending agent determines the credit capacity for each debtor, thus allowing a client to better manage its relationship with each debtor. Factor companies essentially act like an outsourced accounts receivable, credit, and collections management agency.
Regardless of your specific cash needs, factoring can be a valuable option in your financing repertoire. The ability to immediately access the cash value of your receivables while essentially outsourcing your collection and credit departments can be very helpful for your prudent healthcare organization.
For more information on factoring or to speak with one of our professionals about how we can tailor a medical receivables factoring program for your organization’s needs, contact us here or call us at 906-361-0394