Accounts Receivable factoring: What is it?
A regional hospital in the South implemented a new patient acquisition plan with tremendous success. They began signing up new patients at a rapid rate, but they also encountered working capital issues given their high growth. They explored various options to free up cash, including selling their Accounts Receivables, a process known as “factoring”.
Factoring is the practice of purchasing a company’s Accounts Receivable at a discounted rate, then attempting to collect payment on those accounts. The discount rate varies, but can be pennies on the dollar.
Factoring means a steep discount
In healthcare, the discount is usually higher than 50%, so factoring reduces the value to the medical provider of their Accounts Receivable to a fraction of their potential. Factoring your receivables can make sense to companies who have old receivables (greater than 120 days) or don’t expect to collect against them for some reason.
Factoring can have numerous downsides, however, including the uncomfortable fact that a business subjects its customers to collections by a third party. If the healthcare business maintains an ongoing relationship with those clients, that’s going to be a sticky situation.
Another downside to factoring is that certain kinds of receivables cannot be sold to a third party. Government receivables like Medicare and Medicaid are subject to anti-assignment laws and cannot be assigned to anyone other than the provider of the service. If your practice relies heavily on those sources of income, you might have limited options to factor them.
Liquidity without factoring
An alternative to selling your Accounts Receivable to a factoring company is to use them as collateral for a line of credit (LOC). With a LOC, you retain ownership of your Accounts Receivable, which allows you to keep the full value of those assets in your practice. The line of credit allows you to tap into your own accounts from patients, insurers, Medicare and Medicaid.
Access to a LOC means you don’t have to delay capital purchases and investments in your medical practice. It also means you don’t need to build up a cash reserve to cushion you against delays in payments from insurers and other payers.
The regional hospital mentioned earlier didn’t like the discount rate they were offered by factoring companies. Instead, Inspira gave them a line of credit and they retained ownership of both their receivables. They continue to grow as they invest in the patient acquisition plan which made them so successful.
Find out how Inspira can help your healthcare business.