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Leveraging Your Medicare Receivables for Financing

Published 11/7/2012

Are you tired of struggling with cash flow and just want to find some alternative financing solutions, ones that allow you to combine your current credit sources with additional sources? Better yet, do you find that operating in the healthcare industry can be incredibly frustrating due to the long receivable collection times? If you find yourself answering “yes” to these questions, then don't despair. There are solutions. You no longer have to deal with the frustration of lower reimbursement rates on Medicare claims, or extended insurance payments due to extended claim periods. Instead, you can leverage your receivables for additional financing by using receivables factoring.

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One of the going concerns of businesses in today's economy is that banks and financial institutions are less willing to grant business loans and credit lines. This is due in large part to the most recent global financial crisis. The recession dried up the capital markets. Almost overnight, banks and credit unions limited credit and companies everywhere were forced to deal with reduced credit lines. This lack of available credit forced a great number of companies to close, companies that had solid product offerings, but ones that just didn't have the cash to stay open. These credit problems will continue and In fact, in many instances the credit situation will get worse.

Trying to secure credit with a bank is often an exercise in futility. It is a long process that many companies would love to avoid entirely. For instance, your company has to provide all three financial statements. This includes providing your balance statement, your income statement and your cash flow statement. When banks review these statements they are looking for companies that have demonstrated consistent success over a three to five year period. However, how can any company provide a bank with financial statements that show consistency and performance over a period of time that many consider to be the worst recession since the Great Depression? They can't and that's ultimately why financing with a bank just isn't feasible for some companies. However, there's more.

Aside from providing these aforementioned financial statements, your company must also have an excellent credit rating. Again, it's hard to have an excellent credit rating within an economy where many companies have seen customer bankruptcies skyrocket. Even the best companies have seen their credit ratings take a hit over the last four years. There is no way to make up for a customer that goes bankrupt and is unable to pay their invoice. It's a complete write-off for the company trying to collect on the receivable. Therefore, financing through a bank is extremely difficult for new business ventures. It's difficult for companies with poor credit ratings. Finally, it's difficult for companies who operate in markets where customer take long to pay invoices. This is why a number of companies have had no choice but to pursue alternative credit sources.

Understanding Your Alternative Credit Options

Some assume that the only viable sources of credit come from working with a bank, a credit union or a private investor. However, there is a whole other untapped resource of credit, one that most companies are completely unaware of. This untapped resource allows companies to use the current value of the assets under their possession in order to get approved for an advance of capital.

Medicare Receivable Factoring is but one of the solutions that comes from this untapped resource. The other solutions include using a company's inventory in order to establish a business credit line. In this case, a company must have its inventory underwritten in order to secure credit. Other solutions include leveraging the company's real-estate holdings. Still, other solutions include leveraging the value of the company's equipment and machinery. In each of these cases, companies are able to use their assets as collateral.

Healthcare Receivable Factoring is the most common one used because all companies have receivables to collect on. It doesn't matter if your company provides a product or a service. In the end, your company is guaranteed to create an invoice. These invoices can be used to secure the credit you need to finance operations and balance out your cash position. In fact, the credit you secure by way of leveraging your invoices is credit that is immediately available. Most importantly, factoring is similar to a loan, and acts like a loan, but won't be included as one on your balance sheet. This is because factoring is an advance on the value of the unpaid invoice.

Simple Steps to Receivables Factoring

Let's assume you have a third party payor (customer) that typically takes your company 90 to 120 days to collect on your receivables with this customer. While your customer has always paid their bills, it is still difficult to manage your business with such extremely long receivables collection times. Therefore, rather than wait the full 90 to 120 days for your customer to pay, you instead sell that receivable to a financing company. In return for the purchase of the receivable, the financing company advances your enterprise a percentage of the receivable's value. In most cases, 80 to 90 percent is provided as an advance on the receivable.

Since the financing company has financed the receivable, the financing company will proceed to collect from your customer. Once your customer pays, the finance company will credit your account the difference between the original capital they provided and the final payment. There is an administration fee that is applied against the total value of the invoice. This administration fee is a daily effective rate that is charged against the value of the advance. This daily rate is calculated based on the number of days it takes the financing company to collect on the receivable. The daily effective rate is made up of the current prime rate and an interest rate.

With receivables factoring, you are able to combine your existing financing sources with an additional source, one that allows you to avoid the hassles and stress of waiting on customers to pay. After all, receivables collection can be a long and drawn-out process. It takes a lot of time and resources to collect on an unpaid invoice. Using receivables factoring can reduce these costs because you've essentially outsourced the responsibility of collections to an outside company. In the process you've improved your cash flow, freed up valuable internal resources and removed the going concern of an uneven cash position.

Receivables factoring is an extremely flexible financing option. It allows companies to avoid the hassles of applying for credit with a bank. It allows business owners to avoid the embarrassment of having to admit that their credit rating is less than desirable. It allows companies to keep some receivables collection within their doors, while outsourcing other receivables collection to the financing company. It also lets companies use their improved cash position to lower their own financing costs with suppliers by prepaying their own bills and invoices. Finally, it gives companies a sense of empowerment knowing that they control their own finances.

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