How To Finance a Hospital With Medical Factoring
It’s an unfortunate but unavoidable fact that cash flow is a constant struggle for many hospitals, largely due to the lengthy waiting periods for insurance companies to pay out on hospital claims. Hospitals In search of relief are increasingly turning to medical receivables factoring as a financing option that offers several benefits over traditional bank financing.
The Cash Flow Conundrum
Third-party insurance billing can be slow and complicated. Insurance companies can take anywhere from 30 to 180 days to pay claims, and the process can take even longer for disputed claims. At the same time, hospitals face a steady stream of expenses that must be paid in order to keep operating, such as payroll, taxes, insurance, building costs, maintenance and equipment fees, and utilities. Given the unpredictable nature of a hospital’s income stream, cash flow can seem impossible to manage at times. Factoring is an attractive solution for cash-strapped hospitals.
Receivables Factoring Explained
Factoring, also known as “invoice factoring” or receivables factoring,” is a financial practice in which an investor, called a “factor,” advances money, using receivables as collateral. In a hospital context, a factor advances the hospital an agreed-upon percentage of the hospital’s unpaid medical claims, usually around 75% of the face value. When the claims are paid, the factor remits the remaining 25%, less the finance fees for the factor’s service. Factoring can be used with most third-party insurance claims, including claims payable by programs like Medicare and Medicaid, in addition to claims against private insurance companies.
How Factoring Helps Hospitals
The obvious benefit of factoring to hospitals is that factoring provides the hospital with immediate cash. Unlike irregular and unpredictable payments from insurance companies, factoring can be a consistent source of income, which can significantly reduce the financial strain on a hospital. In addition, this type of funding is not considered a loan or a debt and does not negatively impact the hospital’s credit. Factoring is an excellent option for hospitals that might not qualify for a traditional bank loan, including those facing restructuring, tax issues, or even bankruptcy. Furthermore, depending on volume, claim amount, and the efficiency of your collections process, factoring fees can be considerably lower than traditional bank fees and financing rates.
When hospitals face cash flow challenges, they must often look beyond traditional financing options. Medical receivables factoring can provide hospitals with the operating cash they need in a timely and predictable way, making it an excellent option for alternative funding.