Until recently, individual doctors, dentists and physician groups could easily go to their local bank and get all the working capital they needed. But, while banks still loan money for that purpose, getting a loan or line of credit can be an uphill battle.
The ‘credit crunch’ has caused a major tightening in underwriting parameters at banks nationwide. banks typically require a minimum credit score of 685, the practice must have a track record of profitability, and start-ups are excluded. Businesses who would have easily qualified for a line of credit six months ago are getting turned down.
The main problems with a bank loan are: it creates debt on which you pay long term interest at high rates, a low credit score locks you out of qualifying, and it often requires a personal guarantee and additional collateral.
Factoring is an excellent means of acquiring needed cash flow. Medical accounts receivable factoring is the business of buying third-party accounts receivable at a discount so as to make a profit from collecting them. There are very positive differences between bank loans and invoice factoring.
• Invoice factoring is not a loan. It is an off-balance sheet transaction so the factoring fees are a deductible expense.
• Personal guarantees are not normally required, as they are for a bank loan.
• Funds can be received within a week of applying, provided all documents are received in good order.
• With invoice factoring, additional collateral is not required to be pledged.
• Funding is only limited by the company’s pool of accounts receivable, as opposed to bank financing, which usually loans a maximum amount.
• The credit of the business or its owners is not of major importance to the factoring company.
With invoice factoring, funding is limited only by the amount of third party receivables the professional has on its books.
Third party receivables are those amounts due from insurance companies like Blue Cross and government programs such as Medicare and Medicaid. With medical invoice factoring, the healthcare provider submits a batch of invoices to the factoring company and receives an advance at a rate that is determined by the contract.
The advance rate is typically 75% – 85% of the estimated net collectible value of the invoices. The remaining amount (the reserve) is remitted back to the provider upon collection, less the factoring fee.
Are you a healthcare provider or dental professional in need of an infusion of working capital? Referring the best resources for medical invoice factoring is just one of the many money management strategies I provide to my clients to insure they achieve their financial goals and build wealth for their long-term financial freedom.
Another great tool I recommend reading is Dr. Brian Dawson’s new book Breaking The Profit Barrier – The Healthcare Practitioner’s Guide, so check out this book!