Long-term loans such as bank loans may not be the best option for medical practices. Today, more and more medical professionals are considering short-term funding options, such as lines of credit, invoice factoring, and merchant cash advances. Let’s look at the benefits and risks of each funding option.
Business Lines of Credit
Lines of credit provide medical practices with access to working capital without the payment obligations of a fixed-term loan. Lines of credit offer the flexibility of withdrawing and repaying as much as needed and only paying interest on the amount borrowed against the credit line.
Both traditional and alternative lenders offer lines of credit; however, traditional lenders have stricter credit criteria, including higher credit scores. Alternative lenders are more flexible and consider other factors, such as:
- Cash flow
- Vendor payment history
- Years in business
Lines of credit are best for medical practices with strong credit histories that need flexible access to working capital.
Also known as accounts receivable financing, invoice factoring allows a doctor’s office to sell its outstanding invoices to a lender or “factor” in exchange for a set amount in cash equal to 70 to 90 percent of the invoice’s value, usually up to a maximum of $100,000.
Once a patient pays their bill, the factor remits the remaining 10 to 30 percent of the invoice, minus the factoring fee. Repayment terms typically align with the accounts receivable period, generally between 60 and 120 days. To approve funding, the factor will:
- Review and determine patients’ creditworthiness
- Analyze previous invoices
- Assess how successful the practice has been in collecting payment
The factoring fee will be based on the results of their risk assessment. Invoice factoring is best for medical practices with long accounts receivable periods that need to fill the gap between sending invoices and receiving payment, but with invoices not more than 90 days past due.
Because the factor oversees collecting payment from your patients, choosing one you can trust to treat your clients tactfully during the collection process is essential so that you don’t compromise the doctor-patient relationship with your clients.
Merchant Cash Advances
A merchant cash advance (MCA) is not a loan but a form of financing known as an asset purchase. In exchange for a cash advance, the MCA provider will automatically deduct a portion of the practice’s future receivables until the advance is repaid. Payment amounts are based on revenue: when revenue is lower, payments will be reduced — and vice versa.
Unlike bank loans based on an interest rate, merchant cash advances are priced on a factor rate, which is determined by the practice’s financial history. MCAs are typically easier to obtain than other types of funding because credit criteria are less strict than those for traditional medical practice loans.
Merchant cash advances are well-suited for medical practices that need fast access to working capital; however, there are risks. If the business defaults on the MCA agreement, the funder can quickly seize the owner’s assets, including medical equipment and other business assets. Also, merchant cash advances are not strictly regulated and some MCA providers are not reputable.
Medical practices are relying on alternative sources of funding for working capital. While lines of credit and invoice factoring offer flexibility, merchant cash advances carry greater risks. Whether you are considering funding options or struggling under the terms of an MCA agreement, contacting an experienced debt relief specialist is a wise choice.