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Medical device manufacturers are used to dealing with long receivable collection times. They are used to dealing with high receivables financing. They know that their customers are likely to take 60, 90, 120 or even 150 days to pay an invoice. After all, Medicare now has lower reimbursement rates. Insurance companies have long, drawn-out processes, ones that delay invoice payments due to extremely long review times on claims. It's something that medical device manufacturers deal with day in, day out. However, that doesn't mean your company has to accept the status-quo. It doesn't mean your company can't improve its cash position. It doesn't mean your company can't combine alternative financing with existing financing. Don't accept your current situation. Don't accept that an uneven cash position just goes with the territory of operating within the health care industry. Instead, assume a more proactive position with your company's finances. You can improve your cash flow by pursuing an asset-based financing solution like receivables factoring.
Asset-based financing solutions work because they allow companies to use the value of their assets in order to secure business credit lines. For instance, some companies see the equipment and machinery on their shop floor as their biggest assets. Some companies see their office building, their warehouse and other real-estate holdings as their biggest assets. Some companies see their inventory as their biggest asset. Yet, all companies see their receivables as assets. It's these receivables that allow companies to establish business credit lines. Most importantly, it's these receivables that can help medical device manufacturers improve their cash flow and level out their cash position.
Why is Receivables Factoring so Popular Amongst Today's Medical Device Manufacturers?
In order to understand why receivables factoring has become more popular, it's best to define why conventional financing has become less and less reliable. Today's banks and credit unions make it extremely difficult for businesses to secure credit. This is largely due to the most recent global financial crisis, one where large financial institutions almost disappeared under the weight of rampant company bankruptcies. The capital markets have responded to the economic recession by pulling back on credit. So what have banks done to make credit more difficult to secure?
Today's banks have a number of stringent criteria that companies must meet in order to secure credit. First, companies must have a flawless credit rating. As such, their credit history must be exemplary. Second, companies must provide banks with all three of their financial reports. This means they must have a solid income statement, a solid balance statement and an excellent cash flow statement. In addition, these financial statements must show consistent performance over a five year period. Finally, banks also assess the health of the industry that the company operates in. Therefore, if the industry itself is seen as a credit risk, then the company may be refused for credit, regardless of its ability to pass the other aforementioned criteria.
The reality is that a number of medical device manufacturers are unable to meet these stringent borrowing requirements. For instance, some are new start-ups and incapable of providing financial statements. Some have been in business for decades, only to recently encounter problems, through no fault of their own. Regardless of the situation, it's common for medical device manufacturers to encounter issues with cash flow, especially in an industry where late invoice payments are the norm. Perhaps this is the most frustrating part of managing cash flow for today's manufacturers. How can they use their cash flow statement to secure credit with a bank when the nature of their business and market means they always have to deal with an uneven cash position? It simply doesn't add up.
The Fresh Approach of Receivables Factoring
Unlike banks, factoring companies don't base their lending criteria on your company's cash flow statement. They don't base their decision to provide you with a business credit line on your income statement, and they don't need to review your balance statement in order to feel comfortable advancing you capital. In fact, none of your company's financial statements are needed. All that matters to the factoring company is whether the account debtor can pay the invoice. In this case, the account debtor would be your customer. If your customer has clearly demonstrated a history for paying their invoices, then your company should have no problems getting credit.
Understanding the Process
Every time your company generates an invoice, you forward information to the factoring company about the account debtor. You provide all the relevant information concerning the customer's name, their location, their phone number and the value of the receivable. The factoring company reviews the customer's credit rating and analyzes their payment history. Once your customer's credit rating is confirmed, the financing company advances your company a portion of the receivable. In most cases, that advance is somewhere between 85 to 90 percent.
By selling your receivable to the financing company you have agreed to allow them to collect on the unpaid invoice. Once they do collect from your customer, your account is credited the 15 or 10 percent difference between the initial capital advance and the final payment. Next, the financing company charges your enterprise an administration fee and an effective rate. The administration fee is applied against the total value on the receivable. The effective rate is split up between the going prime rate and an interest rate and is charged against the advance your company receives.
How Does Receivables Factoring Help Cash Flow?
Simply put, receivable factoring for medical device manufacturers helps with cash flow because it allows you avoid waiting 60, 90 or 120 days to collect on a receivable. You don't have to endure one cash crunch after another. You don't have to worry about paying bills, meeting payroll and financing your operations. You don't have to worry about whether you'll be able to cover your material requirements in manufacturing. Finally, you no longer have to overextend your company with its existing credit sources. Instead, you can combine this alternative financing solution with your existing financing. Most importantly, you have the luxury of deciding with customers to use factoring with and which customers to keep in-house. Therefore, if you have a customer who pays on time, then you can keep that customer within your own accounting department and use factoring with the other customers that take longer to pay.
For some companies cash flow is a constant concern, one that inhibits their ability to run their daily operations. For other companies, it's a concern that manifests itself during slowdowns and market declines. Regardless of whether cash flow is a concern for your business year-round, or is a concern that is only present during cyclical business periods, receivables factoring is a solid solution that can level out an uneven cash position. It allows you to take charge of your company's finances without concerning yourself with how long it takes to collect on receivables.