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How medical factoring works
A cash flow solution to keep your healthcare business running smoothly.
Healthcare providers are in a tight spot when it comes to getting paid. Insurance companies take forever — and then patients must cover the costs that insurers won’t. All while healthcare providers are expended to pay their vendors.
Medical factoring is a way for your business to cover overhead costs while you wait for customers to pay their bills. But it isn’t cheap.
What is medical factoring?
Medical factoring is a type of business financing that allows healthcare companies to get an advance on unpaid invoices or claims from private insurance companies, Medicare and Medicaid.
The term refers to two types of medical factoring:
- Medical receivables factoring. More often for healthcare providers that rely on insurance claims.
- Medical invoice factoring. For vendors that provide goods and services to healthcare providers.
How does medical factoring work?
Medical factoring provides quick payments in four steps:
- You submit to the medical factoring company your unpaid invoices for insurance claims.
- The factoring company advances 80% to 90% of the value of those unpaid invoices.
- The company waits for the insurers to pay the invoices.
- Your business receives the remaining 10% to 20% less fees.
While it’s possible to find factoring companies willing to work with you once, most require businesses to sign a contract that covers several months or years of factoring services.
What types of businesses should consider medical factoring?
Any healthcare provider that works with private insurers or government insurance program can benefit from medical factoring, including:
- Nursing homes
- Mental health providers
- Rehab and physical therapy companies
- MRI clinics
- Radiology centers
- Ambulance service providers
- Home health agencies
- Surgical facilities
Vendors that rely on payments from healthcare providers can also apply for medical factoring, including:
- Medical staffing companies
- Equipment suppliers
- Transportation companies
- Transcription service providers
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What does my business need to qualify?
Medical factoring is often easier to qualify for than a business loan. But to qualify for medical receivables factoring, your business needs to meet standards that include:
- At least three months of medical billing history.
- At least $35,000 in accounts receivables a month.
- Insurance claims that are due in 30 to 120 days.
- Other invoices that are due in 30 to 90 days.
- No liens or unpaid taxes.
For insurance claims, factoring companies base their financing on the net payment only. This is the amount the insurance company agrees to cover — not the total invoice amount. Amounts patients must pay don’t count toward your eligible accounts receivable.
How much does it cost?
The main cost for medical receivables factoring is a factoring or financing fee. The fee is typically a percentage of the amount the factoring company is holding.
Fee rates typically range from 2% to 4% of the total outstanding receivables, though you might see rates as low as 0.5%.
When the fee is required can vary by factoring company, with timing that includes:
- Once every 10 days until your clients satisfy their invoices.
- Once every 30 days until your clients satisfy their invoices.
- One fee for the first 30 days and a second smaller fee every 10 days until the invoice is filled.
Medical factoring cost example
Say your business gets an advance on $80,000 in medical receivables. If it takes 120 days for your insurance company to pay off a claim, here’s what you might pay over three fee timing options.
Every 10 days
Every 30 days
3% for the first 30 days, then 1% for every 10 days after
What are the payment terms?
Terms depend on the type of medical factoring you’re applying for. If your company relies on payments from insurance companies, your clients typically have between 30 and 120 days to pay off their invoices. If your business relies on payments from other healthcare businesses, your customers could have only 30 to 90 days to pay their invoices.
The longer your customer takes to satisfy an invoice, the more you’ll pay as fees. If many of your customer invoices are due mid-month — say, in 45 days — you might want to look for a lender that charges a lower percentage more frequently to save on the fee.
What happens if my customers don’t pay their invoices?
It depends. If you sign up for recourse factoring, your company will need to pick up the bill if insurance companies or other clients don’t pay within 90 or 120 days, depending on the type of invoice.
With nonrecourse factoring, your factoring company is responsible for the full invoice.
Some companies also offer modified recourse factoring, which covers extreme situations like a customer filing for bankruptcy.
Recourse factoring might be riskier for your business, but it can come with lower costs. Ask your factoring company if it’s recourse or nonrecourse before you apply — they don’t always advertise it.
What are the benefits of medical factoring?
- Easy to qualify. Medical factoring is often easy to qualify for, given financing is secured by your accounts receivable.
- Potentially fixes cash flow. Your business won’t need to wait for insurance companies, Medicare or Medicaid to pay invoices before you can access that money.
- Fast turnaround. You may see your advance within 24 hours of approval with some companies.
What’s the downside?
- High fees. Medical factoring might be easier to qualify for, but it could cost more than a traditional business term loan or line of credit.
- Considers net payments only. You can’t get an advance on the full value of your bills, just what the insurance company covers.
- Your customer’s credit counts. If your typical customers have a history of paying late, you’ll end up paying more.
- Requires a contract. Most factoring companies require your business to sign up for at least six months of factoring, if not a few years.
- You might end up covering unpaid invoices. If you go for recourse factoring, your business is on the hook for covering any invoices your customers don’t pay on time.
How to apply for medical factoring in 6 steps
Each factoring company has its own application process. But most follow a series of six general steps.
- Send invoices to your clients. For medical receivables factoring, this means billing the insurance company. For medical invoice factoring, you’ll bill the healthcare provider for the goods or services your company provided.
- Submit a copy of your invoices to the factoring company. Companies might also request additional supporting documents, like time sheets, if your company provides services.
- Receive your advance. Factoring companies typically deposit advances into your business’s account in 24 to 72 hours. After that, you’re free to use the funds to cover business costs.
- Wait for your clients to pay their invoices. Most often, clients pay their invoices directly to the factoring company. If a client fails to pay an invoice on time, your factoring company will let you know.
- Get the rest of your advance, minus the fee. After your clients pay up, your invoice factoring company forwards the remaining value of your invoices less its fee.
- Do it all over again. Because factoring is a type of recurring credit, your business can cycle through these steps at least six more times, if needed.
Alternatives to medical factoring
Medical factoring isn’t for every business. Before you sign a contract with a factoring company, consider alternatives that include:
- Medical receivables financing. Lenders like Fundbox offer financing that involves your company taking out a loan backed by your account receivables. Your company pays it back plus interest as your clients satisfy their invoices.
- Business line of credit. Healthcare companies that have been around awhile might benefit from a line of credit instead. Here, your company gets access to a credit limit and pays back only what it withdraws plus interest. It’s typically less expensive than factoring.
- Business term loan. To finance a one-time business expense, a term loan might better meet your needs. These loans pay out in one lump sum from about $2,000 to $1 million, which you pay back over a set term plus interest and fees.
- Short-term business loans. Need a one-time loan but don’t meet most business loan requirements? A short-term loan is typically easier to qualify for. You aren’t locked into a contract, but they can be expensive.
- SBA loans. The Small Business Administration partially guarantees loans to give businesses that have trouble qualifying for loans access to low-interest term loans and lines of credit. It’s a long-term solution requiring a lot of time to apply, and it can be difficult to qualify.
Medical factoring is a working capital solution designed to help healthcare providers and vendors cover overhead costs with fast funding backed by accounts receivable. But while it’s easier to qualify for than a traditional loan, it’s also more expensive.
To learn about more business loan options or to compare lenders, read our business loans guide.
Frequently asked questions
Is there medical factoring for personal injury cases?
Yes. Sometimes called medical lien factoring, companies are out there willing to buy your medical receivables from patients that don’t have insurance and need treatment for a personal injury claim. That way, you’re paid before the lawsuit is settled. Many medical personal injury factoring companies take on the loss if the case is settled.
Can healthcare startups qualify for medical factoring?
Yes, as long as your business meets the factoring company’s eligibility. Most only ask to see three months of billing cycles.
How do I find competitive medical factoring?
The best way to find a competitive deal on medical factoring is by comparing lenders. Make sure you qualify before asking about fees, fee schedules and payment terms. Calculate the total cost before signing up — remember, a 1% fee every 10 days might be more expensive than a 2.5% fee every 30 days.
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