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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.
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 factoring provides quick payments in four steps:
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.
Any healthcare provider that works with private insurers or government insurance program can benefit from medical factoring, including:
Vendors that rely on payments from healthcare providers can also apply for medical factoring, including:
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:
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.
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:
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.
1% | Every 10 days | $9,600 |
2.5% | Every 30 days | $8,000 |
1%–3% | 3% for the first 30 days, then 1% for every 10 days after | $9,600 |
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.
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.
Each factoring company has its own application process. But most follow a series of six general steps.
Medical factoring isn’t for every business. Before you sign a contract with a factoring company, consider alternatives that include:
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.
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