In today’s economic environment, many practices are strapped for cash and are looking for ways to expedite the collection of their receivables. One expensive form of financing that some people are considering is call factoring.
Factoring is basically when a practice borrows against its current receivables, typically insurance receivables, to get quick cash.
For example, let’s say you have $75,000 in insurance receivables, that’s what you expect to collect after write-offs and discounts, but your practice seems to be constantly out of cash or “working capital.” Some people go to a factoring company, and in about a week, they buy their A/R and advance you 80 percent of its value, or $60,000. The factoring company then gives you the remaining $15,000, less some hefty fees, once it receives your A/R.
That instant cash inflow provides you with immediate working capital for today, but how will you finance your practice’s operating capital a month or two from now? Factor your existing accounts receivable at that time? You can see why, in most cases, factoring just doesn’t make sense. When you factor your A/R, you end up taking out a perpetual loan at a significantly higher interest rate than banks would charge for a normal loan.
Many of the current financial institutions that are driving factoring are promoting it toward medical practices that are in financial distress. The key is, if your billing is where it should be, you shouldn’t even need to factor in your doctor’s practice, as the cash flow will be steady and healthy.
In the medical industry, factoring companies generally do not purchase accounts receivable owed by patients. Some even steer clear of accounts receivable related to workers’ compensation. They typically focus on the cash flow of traditional third-party payers. Checks from private payers usually go directly to the factoring company or to a “safe” bank account in the doctor’s name. The physician remains responsible for continuing to bill, accounting for payments, and following up on denials.
Technically, the law prohibits factoring companies from purchasing A/R from Medicare and Medicaid directly. Physicians can still include these amounts in A/R they factor without breaking the law, as long as the government checks first go to a safe deposit box account in the name of the physician.
For the most part, factoring services offer the same basic terms. They typically advance up to 85% of the A/R on a daily, weekly, or monthly basis. Bigger strides can be made to doctors who can illustrate that they have more reliable insurers and pay faster.
The main difference between factoring services lies in the fees they charge. The discount or factoring charge, which is equal to the interest a bank charges, ranges from 1 to 6 percent for each month your A/R remains uncollected. The more A/R your practice sells and the faster it can be collected, the lower the fee you will be charged.
In addition to the discount fee, factoring companies also charge a long list of other fees, such as an application fee, a due diligence fee to evaluate your business, and an origination fee to set up your account. Suddenly, the initial 3 percent fee a factoring company quoted you doubles to 6 percent.
Does factoring ever make sense for a medical practice?
To the inexperienced business person, factoring may seem like a lifeline for doctors drowning in debt, but in fact, it can increase debt, especially if you have a mix of slow-paying insurer payers, leading to a rapid increase in interest. A monthly discount rate of 3 percent translates to an annual rate of 36 percent, which is double what you’d pay with an expensive credit card.
Therefore, factoring should only be used as a short-term solution when your practice is facing dire needs. The real solution is to identify the problem that is causing your practice to be in the position that factoring is being considered or needed.
Many times this comes down to improving the billing and collection process of your practices. If this process runs smoothly and your A/R is being charged as it should, factoring shouldn’t even come into play.
If you are in a situation where you are considering factoring because your cash flow is not where it needs to be, it may be time to seek outside help from an outside consulting firm that can help you improve your billing process and cash flow in general.
