Third-party medical receivables comprise the largest liquid asset of healthcare providers. The receivables are often pledged as collateral to receive much needed working capital. Although the ultimate receipt of the payments from health insurance companies and government programs are likely, traditional lenders often limit the amount of funding. It isn’t because they don’t want to grant loans. It’s because they don’t understand the collateral.Medical billing can be very complicated and if not done correctly, can result in delays in payments or even no payment at all. Because of this, banks may grant a line of credit based on the medical receivables, but will be limited in nature. Typical bank lines may provide the medical professional enough working capital if the practice experiences moderate growth. But if the physician group (or any other type of healthcare provider) is in a fast-growth mode, they will need a constant stream of new working capital to pay for additional staffing, supplies, and even facilities. Bank lines of credit that are collateralized by medical receivables seldom fill this type of need. That is where a specialized medical factoring company comes in.How a Medical Receivables Factoring relationship is formedIn a commercial factoring relationship with a soft drink distributor, for example, it’s fairly clear cut. The distributor receives an order from a grocery store. They ship the order which is then received and accepted by the grocery store. An invoice is generated for the product, which is then submitted to the factoring company for an advance. One of the key components of lessening a factor’s risk is verification that the goods are accepted in good order and that the customer agrees with the amount billed. In this situation, verification is easy. With medical invoice factoring, the due diligence process is more extensive.When a provider initially contacts a factoring company representative, they are asked to fill out a fairly simple application and supply some basic information such as a receivables aging schedule and a breakdown of the receivables by payer. This helps the finance company to determine if the provider is a good fit for their services. If so, a letter of intent (LOI) is generated and submitted to the client. The LOI outlines the proposed terms of the agreement, such as the advance rate and fees to be charged. If the client finds the terms to be reasonable and wants to move forward, the LOI is signed and a check for due diligence charges is issued to the factoring company.The charge for due diligence is not cheap. Depending on the factoring company, the minimum cost for a small practice is around $5,000. For a larger group or a hospital, the charge will be much higher. At this point in the process, many providers decide to not move forward. This is unfortunate because the audit conducted by the factor often discloses billing irregularities and coding errors that oftentimes pays for itself. The audit is necessary in order for the finance company to understand the billing system of the client and to determine the net collectible amount the customer is likely to receive from insurance companies, Medicare, and other third parties. The net collectible amount is an average percentage that is the basis of the advances the client will receive from their invoice submissions.Once the audit is completed, a formal contract is drawn up which specifies the exact terms of factoring arrangement. Unless there are serious collection problems, further auditing is unnecessary and the company submits their billings weekly or even daily for advances. The client is typically given a cash advance from 75% to 85% of the anticipated net collectible amount of the invoices submitted. With this type of financing, the amount of working capital received by the provider is limited only by their pool of receivables.Medical accounts receivable financing is an excellent means of receiving much needed working capital for those healthcare providers who are either growing at a rapid rate or experiencing cash flow difficulties for other reasons.