Factoring

Introduction

Factoring can improve cash flow and operational efficiencies, and it is used in many industries, including the healthcare sector. With this strategy, businesses sell their accounts receivable at a discount to a factoring company (the factor), giving them access to quick cash. The burden of recovering the debt from the consumer who has not paid their invoice is transferred to the factoring company. The corporation has access to its earnings immediately, skipping the customary payout period (Ferguson, 2020, Factris, 2021).

Popularity of Factoring

The worldwide factoring services industry will reach USD 3.5 billion by 2032, growing 8.5% annually. The market’s growth is driven by cash flow management, working capital financing, and SMEs’ use of factoring services (FID Reports and Data, 2023).

The U.S. factoring services market will reach USD 287.61 billion by 2030, growing 8.1% from  153.96 billion in 2022 (Grand View Research, 2023).   According to a survey, factoring services have grown in popularity, especially among Micro, Small, and Medium-Sized Enterprises (MSMEs) that have trouble securing appropriate financing, particularly in working capital. 

There are 127 factoring companies in the US and Canada.  Mazon Associates in Dallas, Crown Financial in Houston, Provident Commercial Finance in Chattanooga, Bankers Factoring near Atlanta, J D Factors in Los Angeles, and Velocity Financial in Midland are considered to be the top-performing 2023 companies (Factoring Club, 2023).  A few other examples include (Treece, 2023):

1. FundThrough offers 100% advance rates on up to $10 million in finance, with costs starting at 2.75%.  
2. Riviera Finance offers 95% advances on $5,000–$2 million loans. They are known for their individualized service and face-to-face knowledge.
3. altLINE offers up to 90% advances and can quote lending amounts. They specialize in huge invoices and charge 0.50% APR.
4. TCI Business Capital finance $50,000–$10 million at 60%–90% advance rates. They offer bespoke factoring solutions and don’t disclose their APR.

Healthcare providers frequently encounter delays in receiving reimbursements from insurance companies. The quality of healthcare providers’ services may suffer due to delays (Fundbox, 2023). Healthcare providers use factoring firms to speed up the payment procedure. They sell the health insurance claims—basically unpaid invoices—to factoring companies, who recover the claim payments from the insurance providers. By ensuring prompt claim payouts, this method aids healthcare providers in maintaining their highest levels of operational effectiveness.  On the other hand, some practice owners may disapprove of the factor’s specific approach to managing patient or payer interactions (Factris, 2021).  

Factoring Process 

Initially, healthcare vendors or medical providers send invoices (claims) to either a medical provider or third-party payer (Medicaid, Medicare, private insurance companies) for services rendered or goods provided. Following this, a copy of the invoices, along with any supporting documentation, is submitted to a factoring company like PRN Funding, LLC (PRN Funding, 2020).

Subsequently, the factoring company purchases these invoices and advances 80-90% of their face value, with funds typically deposited directly into the vendor’s or provider’s bank account within 24-72 hours. The remaining percentage is used as a buffer in case some bills do not get paid or if there are billing errors. Eventually, the reserve, less the factoring fee, is released back to the vendor or provider after receiving payments (PRN Funding, 2020).

Step-by-Step:

1. Healthcare vendors or medical providers send medical claims to medical providers or third-party payers (such as Medicaid, Medicare, or private insurance companies).
2. A factoring business (the factor) 
   1. Receives copies of the invoices and any necessary supporting documentation.
   2. Purchases these invoices at a discount, typically around 80-90% of their face value.
   3. Advances the funds directly into the vendor’s or provider’s bank account within 24-72 hours.
   4. Holds a portion of the invoice amount as a reserve in case some bills go unpaid or there are billing errors.
   5. Assumes the responsibility of collecting outstanding payments from insurance providers, relieving the healthcare provider from the burden of debt collection.
   6. Collects the payments received from insurance companies or third-party payers.
   7. Releases the reserve, minus the factoring fee, back to the vendor or provider once the payments are received.

How does the factor estimate the quality of the outstanding claims?

The factor assesses the quality of outstanding claims through various methods and criteria.   This assessment helps determine the likelihood of prompt payment, helps minimize non-payment risk, and ensures that the factor can provide immediate capital to healthcare providers while maintaining a reasonable level of risk.  Here’s how the factor determines the quality of the outstanding claims:

1. Evaluation of the payer: The factor examines the insurance companies or third-party payers responsible for reimbursing the claims. They consider 
   1. the payer’s reputation, track record of timely payments, financial stability, credit scores, and payment history. 
   2. Specific policies, guidelines, and requirements for claim processing. These include claim submission deadlines, pre-authorization requirements, and claim acceptance rates.
2. Collaboration with healthcare providers: Factors collaborate closely with healthcare providers to gather information about outstanding claims. Providers may share their experiences with different payers, providing valuable insights into the quality and reliability of the claims.
3. Verification of claim documentation: The factor reviews the supporting documentation accompanying the outstanding claims. This includes verifying the accuracy and completeness of the medical records, coding, and billing information. Thorough documentation ensures that the claims are valid and are more likely to be paid.
4. Analysis of historical data: The factor analyzes the provider’s historical payment patterns from different insurance companies or payers. This analysis helps identify any trends or patterns of delayed payments or denials, providing insights into the quality and reliability of the outstanding claims.
5. Industry Knowledge and Expertise: Factors with experience in the healthcare industry develop expertise and knowledge about various payers, their reimbursement practices, and the industry’s dynamics. They stay updated with industry news, regulatory changes, and trends that may affect payment processes. This industry knowledge enables them to predict payment delays and amounts.

Strategies for Choosing the Best Factor for Your Practice

The factor selection decision depends on the factor’s stability and track record, the factoring service fees (2%-3.5% monthly was typical in 2022), the terms of the factoring agreement, the type of factoring (recourse or non-recourse), and the speed of receiving funding.   The difference between recourse and non-recourse factoring is outlined below:

• Recourse factoring is the most popular type of factoring. The provider must buy back invoices that the factoring company cannot collect. Nonpayment is the client’s responsibility. 
• Non-recourse factoring transfers most client non-payment risk to the factoring company. Non-recourse factoring is growing in popularity. Non-recourse factoring has special conditions, and the providers are not liable for non-payment.

When selecting a factor for your practice, consider any hidden fees and costs, the types of additional products offered, and whether the factoring firm caps the amount one can finance (Porter Capital, 2020).

Integration of Factoring with Existing Revenue Cycle Management Processes

Factoring integrates seamlessly with existing revenue cycle management processes, strengthening the overall financial ecosystem of the healthcare practice (Hales, 2022). It acts as a financial bridge, filling the gaps created by delayed reimbursements and ensuring the continuous operation of the practice. Moreover, many factoring companies provide additional services such as professional receivables management, reporting, and collection services, further easing the administrative burden on healthcare practice (Treece, 2023).

Factoring Trends

In 2023 the following trends continue to play essential roles in Factoring:

• Digitization, automation, and modern technology are transforming the factoring sector. Online platforms, electronic documents, and digital payment mechanisms speed up activities.   Traditional factoring companies and fintech collaborate to improve procedures, customer experience, and risk management.
• The increasing scope of value-added services: Credit management, collections, risk assessment, and supply chain finance are being introduced. This gives firms access to a full range of financial products and support, improving operations.

• Industry-specific factoring: Industry-specific factoring is growing. Factors are increasingly specialized in healthcare, construction, transportation, and manufacturing to understand better the demands and problems of firms in these areas and deliver personalized factoring solutions (Grand View Research, 2023).
• Sustainability and ESG (Environmental, Social, and Governance) compliance:   Factors use ESG criteria in risk assessment, examine their clients’ sustainability activities, and connect their financing strategies with responsible and sustainable business operations (Grand View Research, 2023).  When financing clients, they evaluate environmental effects, labor practices, supply chain management, and corporate governance.  This method pushes organizations to improve ESG performance and link their operations with global sustainability goals. Supporting sustainable enterprises promotes a more sustainable and responsible economy.

References

1. factorfoxsoftware. (2021, May 3). How Medical factoring is Changing the Industry – FactorFox. FactorFoxSoftware. https://www.factorfox.com/blog/how-medical-factoring-has-been-changing-the-healthcare-industry/
2. factorfoxsoftware. (2022, December 1). How Does Factoring Work? – Step-by-Step Guide – Factorfox. FactorFoxSoftware. https://www.factorfox.com/blog/the-factoring-process/
3. Factoring Club. (2023). FactoringClub | Factoring Companies in the U.S. and Canada. Factoring Club. https://factoringclub.com/
4. Facturis. (2021, August 11). The Pros and Cons of Factoring. Factris. https://www.factris.com/en/news/factoring-pros-and-cons/
5. Ferguson, N. (2020). The Square and the Tower: Networks and Power, from the Freemasons to Facebook. Penguin Books.
6. FID Reports and Data. (2023). Factoring Services Market Size 2023, Forecast by 2032. www.reportsanddata.com. https://www.reportsanddata.com/report-detail/factoring-services-market
7. Fundbox. (2023). Guide to Medical Factoring. Fundbox.com. https://fundbox.com/resources/guides/medical-factoring/
8. FundThough. (2023). Your Guide to Medical Invoice Factoring | FundThrough. FundThrough. https://www.fundthrough.com/invoice-factoring-medical/
9. GoodX. (2021, April 14). Improve Your Cash Flow with Medical Factoring. Www.goodx.healthcare. https://www.goodx.healthcare/news/improve-your-cash-flow-with-medical-factoring/
10. Grand View Research. (2023). U.S. Factoring Services Market Size Report, 2030. Www.grandviewresearch.com. https://www.grandviewresearch.com/industry-analysis/us-factoring-services-market-report
11. Hales, A. (2022, August 19). Why Is Revenue Cycle Management Important? BellMedEx. https://bellmedex.com/why-is-revenue-cycle-management-important/
12. Layman, J. (2020, February 20). How to Use Medical Factoring to Increase Cash Flow in Your Health Care Practice. Www.linkedin.com. https://www.linkedin.com/pulse/how-use-medical-factoring-increase-cash-flow-your-health-layman/
13. Nelson Hardiman. (2015, March 17). Nelson Hardiman – Healthcare Lawyers – Healthcare Factoring and Medical Invoice Factoring, Explained. Nelson Hardiman. https://www.nelsonhardiman.com/healthcare-factoring-medical-invoice-factoring/
14. Porter Capital. (2020, June 1). How To Choose The Best Factoring Company (10 Considerations). Porter Capital. https://portercap.com/10-things-to-consider-when-choosing-a-factoring-company/
15. PRN Funding. (2023). Medical Receivables Factoring – Fast Financing for the Healthcare Industry. PRN Funding. https://www.prnfunding.com/medical-receivables-factoring
16. The Facts About Medical Factoring – Texas Health Law. Texas Health Law. https://texashealthlaw.com/the-facts-about-medical-factoring/
17. Terra, R. (2022, April 13). The future for factoring solution providers: trends and opportunities. Aptic. https://www.aptic.net/blog/2022/04/13/the-future-for-factoring-solution-providers-trends-and-opportunities/
18. Treece, K. (2023, June 2). Best Factoring Companies Of 2023 – Forbes Advisor. Www.forbes.com. https://www.forbes.com/advisor/business-loans/best-factoring-companies/

A Future Book Publication Note:

This article is a chapter in the forthcoming 2nd Edition book “Medical Billing Networks and Processes,” authored by Dr. Yuval Lirov and planned for publication in 2024. We will post more chapters on this blog soon.