With medical factoring emerging as a reasonable method of alternative financing, many owners of small and medium-sized enterprises in the health care sector are starting to show interest in the process. The following are Frequently Asked Questions about factoring in general and how it can benefit the health care industry in the United States:
What Is Medical Factoring?
Factoring is a method of financing that differs from lending in the sense that clients do not actually borrow money. What actually takes place in a factoring transaction is that a firm purchases account receivables. In the health care industry, factoring firms mostly purchase insurance claims and invoices; in some cases, they can even purchase Medicare claims. This is done by acquiring the financial rights to account receivable items, which means that the factoring firm tenders a cash advance in exchange for an outstanding claim or invoice.
Is Medical Factoring Better Than a Business Loan?
Financial firms that provide medical factoring are conscious about the cash flow challenges that health care providers often face. To this effect, medical factoring is very advantageous because most banks see cash flow difficulties as being detrimental to their lending operations. The underwriting of business loans in the United States has become very strict in the wake of the global financial crisis, and lending terms are not the most attractive for small business owners. Such is not the case with medical factoring; this is a process that takes only a few days and provides very fast cash advances to approved clients.
What Is the Typical Approval Process for Medical Factoring?
- Due diligence and an audit of billing practices can take between one to five business days
- An agreement is executed between the medical services provider and the medical factoring firm
- A copy of an invoice or insurance claim is submitted to the medical factoring provider
- The medical factoring firm issues a cash advance that represents a substantial percentage of the claim of invoice submitted
- The factoring provider collects the invoice or claim payment as per the terms of the agreement
What Kinds of Account Receivable Items Are Accepted?
Insurance claims and valid invoices for health care services performed are accepted by medical factoring firms. In the case of Factor Funding, claims made to Medicare, Medicaid, state agencies and insurance companies are also accepted.
Who Handles the Bill Collection Process?
One of the most advantageous aspects of medical factoring is that it can be set up to lift the burden of bill collection off the shoulders of small business owners. Since the medical factoring firm purchases the financial rights to enjoy payments from account receivables, the collection process falls upon the firm. Furthermore, there are recourse and non-recourse factoring options to choose; the latter means that the medical factoring firm assumes any losses from unpaid invoice or claims while the former entails an agreement by the medical services provider to absorb some of the risk.
Will Patients and Clients Notice Any Difference in the Billing Process?
For the most part, American patients and people who do business with providers of medical services are used to dealing with third parties when it comes to paying bills, claims and invoices. The medical factoring process is mostly seamless and transparent; business owners who use this type of financing are welcome to tell their patients and clients about it.
How Does Medical Factoring Help the Health Care Industry?
Immediate cash flow and reasonable financial flexibility are two major challenges faced by owners of small businesses operating in the competitive health care industry. Medical factoring provides immediate relief in this regard; for example, a provider of medical supplies can pick and choose which invoices should be financed by factoring. The idea is to get almost instant cash advances to allow the business to operate; this is very important for small companies that are trying to survive at a time when health insurers are taking up to 90 days to settle claims. It is important to allow small business owners to grow and expand instead of tying them down to high-interest commercial loans.
