In my last article, I briefly introduced accounts
receivable factoring as a viable financing option for
medical transcription services who are just starting up or
who are in the midst of a rapid growth period. Rather than
waiting weeks or months to be paid, a medical transcription
company can receive cash immediately by selling its
invoices at a discounted rate to a factor.
I went on to explain the three main categories of factors:
general factors, who are large and operate nationally,
accepting clients from a multitude of industries;
geographic factors, who specialize in funding clients who
are proximal to the factor's location; and
industry-specific factors, like a medical transcription
factoring firm who base their clientele around one specific
business niche.
After deciding which kind of factor would be the best fit
for your medical transcription funding needs, the next
logical question to ask is, "How much does it cost?"
Before jumping in blindly and talking numbers, it's a good
idea to have a general understanding of how the factor's
fees are structured. Allow me to elaborate.
When a factor advances you money on your receivables, they
are actually making a legal purchase of your invoices at a
discounted rate. This discounted rate can be a one-time
flat fee, or it can vary depending on how long the factor
owns the invoice, whereby the factor charges a certain
percentage corresponding to the number of days that it
takes for the invoice to be paid. It's important that you
know upfront how the factor determines its fees to make
sure that you are getting the best deal for your invoices.
And of course, it all boils down to how your own company
operates, how long it takes for your customers to pay your
invoices and what you feel comfortable paying. In general,
discount fees can be affected by a number of things,
including the length of the contract to which you are
willing to commit, the average monthly purchase volume of
your account, the average size of your invoices, the number
of account debtors (customers) you do work for and the
credit quality of those debtors to name just a few
variables.
Among some other things to consider when selecting a
medical transcription financing company are advance rates.
Advance rates are exactly what they sound like, the amount
of money that a factor advances you up front upon
purchasing your invoices. Currently, the industry norm is
80 percent. Of course this rate can vary, and oftentimes
factors determine their advance rates on a client-by-client
basis. There are a number of aspects that could affect
your advance rate, and they frequently depend on your
customers' payment history. In fact, most factors will ask
that you provide a current accounts receivable aging report
sometime during the approval process to get an idea of how
long it takes for your customers to pay and if they
generally pay the invoices in full. Quick payments and
payments that are made in full will increase your chances
of having a higher advance rate. In addition, some factors
will increase the advance rate over time as your business
grows and the factoring relationship solidifies.
On the other hand, if your customers routinely short-pay on
your invoices or if they take longer to pay, your advance
rate most likely won't be as high. One example is signing
a contract with a hospital that is net-60, and the hospital
is notorious for paying 30 days late. Since it becomes
harder to collect on invoices the longer they go unpaid, a
factor that knows your clients pay in 90 days will not feel
as comfortable advancing you a high amount on your invoices.
Of course there are both positives and negatives for high
and low advance rates. For example, a factor advancing 95
percent upfront will probably charge higher discount fees,
but you have the benefit of receiving funds for the entire
invoice amount. On the other hand, a factor that advances
75 percent will charge lower discount fees, but you won't
be able to receive as much money up front.
I would also like to mention that there are numerous other
possible fees a factor could add into their fee structure.
So before making your decision based on the advance rate
and discount fee alone, make sure to look into the factor's
extra fees. Some examples of "extra fees" that a factor
may charge include application, origination and due
diligence fees. These charges are often set in place to
cover the costs of running credit and background checks on
your customers, compiling and shipping legal documentation
and putting a lien in place once you become a client.
Other factors will add in administrative fees for postage,
long-distance phone calls, or computer time. Then there
are fees associated with funding procedures, identifying
set prices for a same-day wire to your bank account or an
overnight transfer of funds. Most of the remaining costs
can be bunched into the category of "penalty fees," in
which a factor could charge you more for misdirected
payments, aged invoices or an early termination of your
contract.
Although advance rates and discount fees tend to be the
main concern when business owners are shopping for medical
transcription receivables funding, I hope that this article
has helped you realize that they are not the only two
things to consider. There are a number of other types of
fees that may or may not be tacked onto your funding deal,
depending on the factor. In addition, like I stated in the
previous article, depending on the volume your company is
invoicing on a monthly basis and where you are located will
all play a crucial role in your overall decision-making
process.
I encourage you to read the third and final article in this
series to explore the legal documentation involved with a
medical transcription factoring deal. You will find that
the length of time you are willing to commit to selling
your invoices to a factor as well as the type of guaranty
you are willing to sign are important aspects to consider
when looking for the factor who will best be able to meet
your medical transcription invoice financing needs.
----------------------------------------------------
Philip Cohen is the founder and president of PRN Funding,
LLC, which is an extraordinarily focused niche player in
the healthcare staffing invoice financing market place.
Through a process known as factoring, PRN Funding provides
business owners with the financial resources needed to grow
and compete in the industry. Contact Philip Cohen at
866.776.5407 or pcohen@prnfunding.com. Please visit PRN
Funding on the web at http://www.prnfunding.com .
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