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When thinking of conventional financing, think of securing a business credit line, loan and capital advance through a bank or credit union. Think of the process involved in applying for credit through a bank. Think about how banks measure risk by assessing your credit rating and your company's financial performance. Think about how banks also look at the market and industry you operate in. Finally, think about how this entire process is predicated on your company providing all three financial statements. Bank financing is becoming more and more difficult to secure because of the current economic climate, a climate that makes all of these aforementioned criteria more stringent.
Banks are not the best lending source for Medicare Receivables
Banks aren't willing to lend your company money unless you can provide a balance statement, a cash flow statement and an income statement. In addition, all three of these statements must pass muster. In essence, your company has to demonstrate a solid history of performing at a high level. Some banks are so reluctant to provide credit that they insist on an applicant having 5 years of consistent returns. Unfortunately, these criteria close the door for a lot of medical device manufacturers, ones who have cash flow issues because of the type of industry they operate in, and ones who may not have a high enough credit rating to pass the bank's requirements. However, receivables factoring is different.
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How Medical Device Companies get Approved for Receivable Factoring or Asset Based Lending
Factoring companies for Medical Receivables don't base their decision to approve your company for credit based on your credit rating. They don't review any of your financial statements and they don't immediately disqualify a company because it operates in a high risk industry. In fact, they welcome high risk industries because they have experience working with companies who have long receivable collection times. Instead, the factoring company will advance your company credit based on your customer's credit rating. In this case, the factoring company is mainly concerned with the account debtor's ability to pay the invoice.
How Receivables Factoring Helps Medical Device Manufacturers
So how does receivables factoring help your position as a manufacturer? First, it improves your cash flow by allowing you to treat your receivables as a form of business collateral. Second, it allows you to avoid the issues of receivables collection. In this case, you spend less time worrying about collecting on a receivable and more time focusing on what you do best. Third, it helps your company avoid material shortages caused by a lack of working capital. Again, work stoppages caused by material shortages are inexcusable. However, they are a reality for manufacturers who can't maintain a positive cash position. After all, your company could have excellent gross profit margins and yet still go bankrupt because of a lack of viable credit and financing. Finally, receivables factoring allows your company to reduce your material costs by giving you the opportunity to prepay vendors on shipments. Prepayment allows you to negotiate more favorable prices which further reduces costs.
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Receivables factoring involves selling your receivables to a factoring company
The factoring company then advances your company anywhere from 80 to 90 percent of the net collectable amount of the receivable. By purchasing the receivable, the factoring company owns the right to collect from your customer. Once your customer pays their invoice, your company is reimbursed the difference from the original capital advance and the customer's final bill payment. The factoring company then charges your company an administration fee and an effective rate. The administration fee is applied to the total value of the unpaid invoice. The effective rate is made up of an interest rate and a monthly average of the prime rate.
The difference between financing with a bank and financing with a factoring company is that unlike banks, factoring companies welcome enterprises that have poor credit ratings. They welcome companies that operate in markets where long receivables collection times are the norm. They welcome companies who are overwhelmed with receivables collection. Finally, they welcome companies who know their customers will pay, but who also know they can't afford to wait for them to pay.
The reason why receivables factoring has become so popular for today's medical device manufacturers is because it allows them to reduce their borrowing costs. It allows them to maintain a positive cash position. It allows them to lower their purchasing costs by prepaying orders on materials, spares and consumables. Finally, it helps them improve their cash flow, and most importantly, it allows them to broaden their financing pool by combining conventional financing with asset-based financing.
The biggest misconception on the part of medical device manufacturers is that receivables factoring is a new asset-based financing tool. It isn't new. It's a solution that businesses have relied upon for thousands of years. It's one that construction companies rely upon. It's one that the textile industry and garment industry rely upon. Ultimately, any company operating in an industry where it takes a long time to collect on a receivable is one that can benefit from this asset-based financing solution.
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