Medical Factoring: Business Financing For Medical Professionals
The healthcare industry is notorious for having very slow payment cycles, where insurance companies, HMO's, Medicare and Medicaid can take anywhere from 30 to 120 days to pay an insurance claim. Most healthcare providers find that this is a very difficult process to manage and can create cash flow problems. Obviously, you can improve this situation by building a cash reserve to be used while waiting for payments. But building a reserve to cover up to four months of expenses (120 days) can be very difficult, especially for companies with high cash demands like medical offices, testing centers, clinics, nursing homes and durable medical equipment providers.
The problem is fairly simple to diagnose. Healthcare providers have cash flow problems because their expenses flow out quickly, but their income flows in slowly. Sure, they can be profitable on paper because income exceeds expenses. But in reality, they have no cash on hand. This problem can be solved by using business financing.
Can a bank help?
Although the problem can be solved easily by using business financing - getting financing won't be easy. Especially for a lending institution. If you own a medical office and are a doctor you should be able to get a signature loan. Most lending institutions are quite happy to lend to medical doctors because they have such a high income potential - which is great collateral. Unfortunately, getting financing for everyone else can be very difficult. Most lending institutions will demand to see substantial collateral to cover their risk. They will also want to see a past record of profitable operations. Meeting these requirements can be very hard for small and growing healthcare providers.
A better alternative - finance your receivables
You probably would not have a working capital problem if your insurance company providers didn't pay their claims slowly. While there is little you can do to make them pay faster, you can many of the benefits you would get from a quick payment by using medical factoring. It's tool that allows you to finance your medical receivables from slow, but reliable, insurance payers. This providers your medical business with immediate working capital that you can use to pay operating expenses. More importantly, it will stabilize your operating capital, allowing you to serve more patients and grow your business.
Is this solution right for your company?
Although this solution is very flexible, it is not for everyone. Financing your medical receivables has a good chance of helping you if:
- Your healthcare company has cash flow problems - and -
- You have a lot money tied in slow paying insurance claims - and -
- You need the money to cover ongoing operational expenses
However, this solution is probably not the right solution for you if you need the money to buy expensive medical equipment or need to cover fixed startup costs. There are other solutions that are better at handling those issues.
How does it work?
Transactions usually finance your insurance claims in two installments, which are called the advance and the rebate. The advance is wired to your account as soon as the claims are submitted to the insurance company. The advance rates averages between 70% to 80% of you open claims. The remainder 20% to 30% (less a fee) is rebated to your account as soon as the insurance company pays the claim in full.
There is one caveat that is very specific to factoring in the medical industry. Most medical professionals bill two different amounts for their services. The larger amount is what they bill the insurance for their services. The smaller amount is what the insurance company will actually pay for those services. The amount that the insurance company will pay is called the net collectable. The advance and the rebate are based on the net collectable amounts.
Who qualifies for this solution?
To qualify for medical receivables factoring, your healthcare company needs to work with creditworthy medical insurance companies, Medicare or Medicaid. Your company must have good billing practices and must be able to show a track record of effective billing operations. Also, your accounts receivable must not be encumbered by liens, and the company must be free of major legal or tax issues.
The application and due diligence process usually lasts a week or two. Submitting a full application package early on to the medical factoring company, along with financial statements, a billing record and an executive history will certainly increase your chances of approval. Also, when you submit an application, be sure to avoid common mistakes like missing information or illegible writing.
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