Many people are amazed when they find out how large the invoice factoring industry in the United States is. Every year, people and organizations spend over $4 billion on this market.
On the other hand, many people have never heard of a factoring agreement and do not understand why there is such an incredible amount of demand for them. Factoring agreements are a powerful financial tool that can help medical facilities grow and maximize their efficiency. But what exactly are factoring agreements, and how do they provide their benefits?
Read on to learn all about the most important things to understand about why facilities need a factoring agreement!
What Is Medical Factoring?
Some people call factoring agreements medical factoring or healthcare factoring. Regardless of the term used, everyone is talking about the same basic idea. A facility can sell its accounts receivable invoices to a buyer.
This is different from the ways that many facilities secure financing. Many facilities depend on a good credit score to prove that they are worth trusting with a loan. However, that is not always an option, so the medical industry has developed other ways for facilities to find financing.
A new company might not have enough time in the business to have a fantastic credit score, but it has its accounts receivable as proof that it is finding customers. A potential buyer can assess how likely a facility’s accounts receivable are to turn into real income.
Whether or not accounts receivable invoices are valuable will depend on how easy it is to collect on them. Once prospective buyers have calculated this, they can combine the value of the accounts receivable invoices on paper with the probability that they will be able to collect on them.
They can then offer a discounted purchase rate to the medical facility. This whole process is known as medical factoring.
How Does Healthcare Factoring Work?
We have so far described the most central part of invoice factoring. However, many invoice factoring details come with an added detail.
Your medical factoring agreement might state that you will buy back accounts receivable invoices that the buyer cannot collect on. On the other hand, you might insist that all sales are final. This is known as a non-recourse factoring agreement.
This places more risk on the buyer. As a result, they may only be willing to pay a lower price for the invoices. Regardless, once you have decided if you will use recourse invoice factoring, you can move on with the factoring process.
That means that the seller will need to generate their invoices and allow the buyer to verify them. Once that is done, the seller can often receive payment for invoice factoring right away.
Simplify Your Payment Processes
Factoring agreements provide several benefits. Although most people focus on the financial benefits, they can also help improve the operations of a facility.
Many facilities have to be self-contained entities that manage every crucial aspect of their operations at the same time. However, facilities are sometimes better at certain operations than others. One facility might excel at marketing or providing medical services while another might shine when it comes to collecting accounts receivable.
If a company is not as good at collecting accounts receivable invoices, then it can be beneficial to outsource collections to another institution. That way, the facility can focus on what it is best at.
This allows facilities to apply an important principle of efficiency in the business world. It is important to double down on your advantages and avoid wasting too much time on operations processes that are more challenging.
Invoice Factoring Provides Quick Financing
When a facility needs financing fast, invoice factoring is sometimes the best option.
One of the reasons that invoice factoring is fast is that it involves the transfer of an asset. That means that there is no money loaned and thus much less risk for everyone involved.
The end result is that buyers do not need to spend as much time making sure that they are not going to lose money on a bad loan. As we have discussed, buyers will verify the invoices that the seller generates. At that point, the seller can receive immediate payment, making this one of the fastest ways for a facility to secure financing.
This can also make invoice factoring an available emergency option. If a facility ever needs money fast, they can always make an invoice factoring deal as soon as possible.
Collection Agreements Are Widely Available
Many forms of financing are only available for facilities that have excellent credit. That can make it much harder for facilities that have not yet established themselves. However, any facility can sell its assets.
That means that invoice factoring is available for almost any facility. Of course, the amount a facility can get for its invoices will vary by a lot. If a company cannot secure a loan, it may not be able to get that much for selling its invoices.
However, there are also exceptions. Regardless, collection agreements are available to many more facilities than loans are.
Understand the Benefits of a Factoring Agreement
Understanding the benefits of a factory agreement can require a little study and understanding. However, the better you understand how factoring agreements work, the easier it will be to appreciate the powerful advantages they can provide. Depending on your own situation, healthcare factoring might be the perfect way to simplify your business model or access the financing you need.
To learn more about the advantages of working with doctors on lien, reach out and get in touch with us here at any time!