Health Care Providers Find Factoring Companies Fill Financing Void

The credit crunch created by the mortgage crisis has a lot of health care providers looking for financing and many are turning to factoring companies to fund expansions and stabilize operations.

“The business has grown dramatically in the past six months,” said Kent Harlan, owner of Ozarks Capital Funding, a Springfield, Mo.-based financial consulting firm specializing in non-bank financing for businesses and health care providers. “I’m getting flooded with leads and applications because of the credit crunch.”

Factoring companies offer health care providers cash advances against third party receivables that are 90 days old or less, Harlan said. Health care providers typically receive between 75 percent and 85 percent of the value of the receivables before they are collected, and the remaining cash value of the receivables, minus a fee, after the insurer pays the claim.

A 20-year old industry, factoring traditionally has been used by manufacturers, said Sandra Simmons, chief executive of Clearwater, Fla.-based Money Management Solutions. However, health care providers have been slow to adopt the practice, with providers enjoying better access to capital from banks.

With traditional lenders clamping down on all types of loans, Simmons said factoring is an attractive financing alternative for health care providers because it’s not a loan. No interest is charged, and unlike banks which limit the amount of cash loaned upfront or via a line of credit, the amount of financing available from a factoring company is limited only by the value of the receivables.

“They (health care providers) don’t have to pledge any collateral with factoring. Personals guarantees are not required,” Simmons said. “Funds can be received within weeks of applying.”

Harlan added that health providers who may have something in their financial background that may hurt their chances of getting a loan from a bank need not worry, because factoring companies focus on the health care insurer, what it has agreed to pay, and whether a billing system is in place to ensure medical claims are properly coded.

While medical facilities may receive a large chunk of money upfront to fund an expansion or stabilize operations, Harlan cautioned that factoring is not available for one-time cash infusions.

“Typically, factoring is a year’s contract. The average relationship is 18 months,” Harlan said. “If a provider is looking for a one shot working capital loan for expansion or debt consolidation, he should go after a working capital loan.”