When you’re a small business owner and you apply for a loan, in general the bank will be asking if you have anything that can serve as collateral. If you run a medical clinic, you don’t usually have much when it comes to the usual assets. You don’t have any real estate and you usually don’t even own the medical equipment in your clinic. But you do have accounts receivable, and you can use that to get a loan. With a medical A/R loan, you can then get the money you need much more quickly.
Medical A/R Loans
So how does a loan like this work? Essentially, you get a loan depending on the value of the invoices you issue. If you sell medical equipment, then the value of the loan is limited by the value of the invoices you issue to hospitals and clinics. This kind of funding is called invoice discounting.
In a typical case, the loan is actually a line of credit so you can use it like a credit card. The limit is a percentage of the value of the accounts receivable you use as collateral, such as 80%. You can withdraw from the line of credit as you need the money, and you pay interest on that money. The interest depends on the lender and the agreement you draw up—basically it depends on your company’s stability and financial health as well as the creditworthiness of your patients or customers.
As this is a loan, you may be required to collect the money owed to your clinic yourself. But your lender may insist that when you get paid the money must first come to them right away. The fact that this is a loan will also influence your credit rating, and may also affect how you get a bank loan in the future.
Factoring as an Alternative
Medical factoring is not a loan at all. Factoring is the sale of the accounts receivable instead of using them as collateral. You get an advance of perhaps 80% of the value of the accounts receivable, and then you get the rest when the customer or patient pays up in full. The factor gets their fee from this payment before they send you the rest of your money.
With factoring, the application process is much quicker. That’s because your financial health isn’t really much of a concern at all for the factor. That cuts down on the paperwork, and in many cases the approval for the funding can come in only a few days.
What’s truly relevant is the trustworthiness of the customers. For medical factors with extensive experience in the industry, usually they already have a list of insurance companies with whom they have a cordial business relationship. That simplifies the collection process because the factors are usually responsible for the collections. So with medical factoring, you won’t have to bother setting up a collection department of your own.