Medical Factoring: How To Finance Your Medical Office

Medical Factoring

At one time or another, most medical offices, diagnostic centers, medical supply offices, nursing homes, and other businesses in the healthcare industry have to deal with working capital shortages. They have expenses, like payroll and suppliers, that need to be paid regularly. On the other hand, most of their revenues come from medical insurance claims that are subject to long payment cycles. It's not unusual for a claim to take 30, 90 or even 120 days to pay.

As you can imagine, growing expenses that need to be paid quickly coupled with slow revenues is a surefire way to run into financial problems. This problem is more acute with new and growing healthcare companies who haven't had the opportunity to build a cash reserve to handle slow payments. If not managed correctly, these cash flow problems can grow and threaten your ability to run your business. You may need to delay payments to key suppliers, rent - or worse - you may miss payroll. And missing payroll due to cash flow problems can be the start of an unrecoverable process that leads to the firm's closure.

One way to solve this problem is to accelerate the revenues that are tied to your slow paying insurance, Medicare or Medicaid claims. Obviously, insurance providers have little incentive to pay you sooner so there isn't a lot that you can do to speed payment. But, you can get many of the benefits of a quick payment by simply by financing your claims with medical receivables factoring.

How does it help?

Financing your receivables provides you with an immediate injection of working capital, closing the gap in your cash flow. It stabilizes your finances and provides money to pay key business expenses. More importantly, it allows you to take on more patients with confidence, because you can always finance their insurance claims if you need funds.

Transaction are funded in two installments. The first installment is provided immediately after the claims are submitted. It is called the advance. The advance can range from 70% to 80% of the expected claim payment. The remaining 20% to 30% is rebated once the claim is paid by the insurance company. The factoring fee is often deducted from the rebate and range from 2% to 3.5% per 30 days (this varies).

One important detail is that this type of financing only works for slow paying invoices and does not work for invoices that have collections problems and aren't expected to be paid.

Understanding the advance

Most healthcare providers invoice insurance companies for two amounts. The first amount is for their customary charge. The second amount is the negotiated rate, which is what they expect to collect from the insurance company and is often significantly lower than the customary charge. This latter amount is referred to as the net collectable and is what the advance is based on. Obviously, providing financing on the higher amount could lead to an advance that exceeds the net collectable, which could cause problems because you would end up over financing your claims.

Can Medicare and Medicaid claims be factored?

Many medical factoring companies can finance claims from Medicare and Medicaid. Financing these can be more complex than conventional claims because of the rules and regulations of the program. This process can be tricky and you should speak about it in detail with a representative before moving forward.

Qualification and due diligence

Qualifying for medical receivables factoring is easier than qualifying for most conventional business financing programs. Since your medical insurance claims are used as collateral, it's important that the insurance company that pays them has a good reputation and track record. Also, your receivables need to be free of liens and your company should not have serious tax or legal problems.

The finance company will also audit your billing procedures to ensure that they are effective. This is important because the key to using this type of financing is to have an accurate billing process that collects as quickly as possible. This will also help you reduce your financing costs.

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