Rightfully so, Tracy defined the marketing lure of Groupon as “marketing with no upfront fees.” For cash-strapped business owners looking to make more sales, free advertising sounds like a good deal–That is until you break down the numbers:
50% discount to customer
25% fee to deal provider
25% net to business owner
In essence, the business owner only makes 25% AND they have to wait to get their portion, in installments, over time.Tracy outline a simple example, where 1/3 of the business owner’s profits was paid in 5 days, 1/3 in 30 days and the balance within 60 days:
$100,000
-$50,000 discount
-$25,000 fees
=$25,000 received by business owner (33% or $8,333 immediate advance, with the remaining $16,667 paid out over 60 days.)
Then Tracy used the same scenario as though the business owner were factoring:
$100,000
-$5000 factoring fee (average 5%)
=$95,000 received by business owner (80% advance or $ 80,000 upfront, with the balance less the fees received once debtor pays in full).
A small business owner who is trying to grow his/her business during a booming economy will hit some speed bumps when applying for traditional financing if he/she cannot show an extensive profitable operating history. Throw in the current economic climate, and the chance of an entrepreneur obtaining a conventional bank loan is slim to none.
When loans are no longer an option, business owners have to find a short-term funding option to keep them from dipping into their personal savings accounts or having to rely on friends and family for operating cash. Over the past decade, the main fallback has been small business credit cards. During better times, credit card companies actively pursued the small business market. Entrepreneurs were enticed with low introductory interest rates and high credit limits. In addition, banks started offering small credit lines to entrepreneurs who didn’t meet conventional loan requirements, and vendors started relying on the efficiency of credit card payments. Needless to say, the small business credit card caught on like rapid fire. Today, nearly 60% of the nation’s small businesses rely on credit cards to help fund their daily operations, according to the National Small Business Association.
Yet as the economy worsens, entrepreneurs are seeing their interest rates going up and their credit limits going down. With credit card delinquency as high as 12 percent among small business owners, bankers and credit card companies say the only way to decrease the risk in their portfolios is to make some changes with their small business accounts. As a result, nearly three-quarters of small businesses have seen a large cut in their credit limits over the last six months. Now that access to both bank loans and credit cards is hard to come by, where can the nation’s 27 million small business owners turn for funding?
Enter factoring. Now more than ever, entrepreneurs across the nation are in desperate need of a factoring firm that understands the intricacies of today’s funding marketplace.
If you think about it, the process of factoring receivables is very similar to using a credit card. For example, many small business owners use a credit card to purchase additional inventory and then pay down that bill as their customers pay them. With factoring, a business owner could just as easily sell his/her invoices to an invoice factoring firm and receive cash immediately on those invoices. In turn, they can use the cash to purchase additional inventory. In both instances, the business owner has readily available cash to purchase more supplies. In fact, the two funding mechanisms sound almost exactly the same.
However, there is one very important difference. When credit card companies and banks define a credit line and interest rate for a small business credit card, it’s based on the financial strength of the small business or its owner. During an economic recession, credit card companies view the normal ups and downs of a struggling small business as too risky. However, with factoring, the credit decision is not based on the business’ credit at all. Rather, the lending decision is based on the creditworthiness of the company’s customers. Keep in mind that small businesses routinely sell to larger, more established companies. Because these companies are financially sound, they have the ability to continue paying their vendors, even during an economic decline. So in other words, when business owners use factoring, they can literally leverage the creditworthiness of their customers, which leads to lower fees and higher credit limits.
Now as I previously stated, there are 27 million small business owners in America right now who could be looking for another form of invoice funding because of the current state of the economy. Factoring is the perfect funding solution for those entrepreneurs who are unable to qualify for a traditional line of credit or are having difficulty negotiating reasonable rates on a small business credit card.
The article, Tips for Dealing with Slow Paying Customers, first explained how larger corporations are basically informing their smaller vendors that they will be paying their bills late. This kind of situation is forcing small business owners to provide free loans to larger companies, which inhibits their own growth.
The article then discusses a couple of ways that small business owners can respond to the unfortunate circumstances.
John Barrickman, a Costco member and president of New Horizons Financial Group, suggested for small business owners to look into their uncollected receivables, and beef up their collections efforts. He also encouraged small business owners to start utilizing some banking features to help them collect quicker, such as lockboxes, remote payments and electronic processing. He also said that when one or two of a small company’s customers slow down their payments, it’s time to really focus a lot of energy on getting the rest of its customers to pay promptly.
Lisa Aldisert, another Costco member and president of Pharoas Alliance, Inc., suggests for entrepreneurs to take another look at their payables procedures. Aldisert said, “Stretch your payables as long as possible without hurting your vendors, unless you’re offered a discount for prompt payment…[just] don’t be late; you want to maintain excellent trade credit.”
Finally, Tracy Eden (Costco member and president of the Commercial Finance Group) suggested for these struggling small businesses to consider accounts receivable factoring as a way to improve their cash flow. A business owner can sells its receivables to a factor at a discounted rate to receive cash upfront instead of waiting months to be paid by their customers. Factoring firms typically advance between 70-90 percent of the invoice up front. When the factor receives payment on the invoices it purchased, it give the difference between the advance and its fees back to the business owner. It’s a great way for small companies to improve their cash flow and maintain good vendor relationships.
Established, But Wanting to Grow…
Paula’s medical transcription business was five years old and was doing well. Her medical transcription service provided transcription on a regular basis for a number of community hospitals, clinics and physician offices. Things were running smoothly, but Paula was not satisfied. She really wanted to see her medical transcription service grow. She had a number of ideas on how she could expand her business and she knew of some definite growth opportunities in the healthcare industry. Her first plan was to attend a trade show for health information managers that would hopefully land her some new and bigger clients.
Medical Transcription In Demand…
The trade show turned out to be a huge success. Paula had a list of hospitals that were in need of a reliable and professional medical transcription service. Paula was eager to begin servicing these new large clients, but in order to meet the demands of these hospitals her business would need a major overhaul. She would have to increase the size of the dictation system, have interfaces built and recruit and train new transcriptionists. She was going to incur large start-up costs in order to prepare for the new clients, and she was also going to see a tremendous increase in her on-going expenses, especially payroll. In the meantime, it would be many weeks before any of the new clients would pay for her company’s medical transcription services.
Supplying the Demand…
Paula wondered how she would get the money that she needed in order to accommodate the new clients and expand her medical transcription business. She first asked her bank for the working capital that she needed, but she could not meet their requirements. The bank instead recommended that she call a medical transcription accounts receivable factor to provide her with the instant cash relief that she needed. Paula searched the Internet and found PRN Funding, LLC, an accounts receivable factoring company that specializes in funding businesses in the medical transcription industry. PRN Funding looked like a perfect match for Paula’s medical transcription business and she was hoping that they would have the solution for her cash flow problems.
Extend Financing to a Growing Business Without a Loan…
Paula immediately completed an online factoring application and electronically submitted it to PRN Funding via the Internet. She received a phone call later that same day from one of PRN Funding’s account specialists, who walked her through the factoring process. She learned how factoring her medical transcription accounts receivable would provide her with the working capital she needed to expand her medical transcription service.
Factoring Helps an Established Business Grow…
Paula was thrilled to learn that she could factor as few as one or as many as all of her clients and that there were no minimum amounts to factor. With no binding term contracts, she could factor as long as she needed without having to commit to a specific length of time. All she had to do was invoice her clients as usual and then submit the invoices to PRN Funding. PRN Funding would verify and purchase the invoices and provide Paula’s business with a cash advance within hours. PRN Funding provided the answer that Paula needed to expand her medical transcription business and to service the new clients. By factoring her medical transcription invoices, Paula was able to grow her MT business to a whole new level.
An Opportunity for Acquisition…
Barry was the office manager of a temporary nurse staffing company for many years when he was approached with a great business opportunity. The owners of the business were ready to retire and offered to sell their medical staffing company to him. The owners wanted to see their business continued, so they hoped that Barry would agree to buy the business and take over the ownership duties. If not, they would have to look to sell to an outsider running the risk of losing what made the agency unique. They felt that Barry was the best fit for managing the business. He would ensure the on-going success of their temporary nurse staffing company. The owners were even willing to work out a purchase plan with Barry so that he could make payments over time rather than all at once, but he would still need to make a significant down payment in order to secure ownership of the nurse staffing business.
Collateral Needed for Investment…
This opportunity was extremely exciting for Barry and he felt that it would be a great career move. He knew the ins-and-outs of the nurse staffing industry and was confident that he would continue to operate profitably. In a few years, with aggressive sales to area hospitals and nursing homes, he would be able to increase profits for the nurse staffing business. Barry only had one concern. He had no idea where he was going to get the money he needed for the down payment. Temporary staffing organizations simply don’t have the type of hard assets banks require as collateral. Also, the sellers were willing to take a note financing most of the business, but in return they would not allow any senior debt on the balance sheet. If he absolutely had to, Barry could guarantee the loan personally, but that was his absolute last option. There had to be another alternative for Barry to secure the working capital that he needed.
Cash Available in the Outstanding Receivables…
Looking over the financials, Barry realized that there was a significant amount of accounts receivable outstanding. The owners had not been aggressive in collecting or managing their accounts receivable. The services had already been provided, the employees had been paid, but the invoices were still outstanding. Barry remembered seeing an advertisement in one of his staffing journals for PRN Funding, LLC, a temporary nurse staffing accounts receivable factoring company that turned receivables into cash immediately. Promptly, he called PRN Funding and spoke to an account specialist for his business cash flow solution.
A Successful Nursing Staffing Company…
Just as the owners of the nurse staffing company were preparing to sell him the business, Barry was able to establish a relationship with PRN Funding. PRN Funding bought the outstanding invoices, even the invoices that had been issued months ago, and provided the temporary staffing business with an immediate cash advance. Barry used the funds from the cash advance to make the down payment on the business. PRN Funding was also able to actively and professionally collect on the outstanding accounts receivable, freeing up more time for Barry to concentrate on operating his business and ensuring the continued success of his nurse staffing company.
However, many of those rumors are a result of misinformation and poor staffing factoring research methods.
This article will help debunk some of the more common factoring myths so that staffing business owners can make an educated decision when it comes time to finding the appropriate funding solution for their cash flow problems.
Healthcare Staffing Factoring Myth #1: I’m nervous to factor my healthcare staffing invoices because my customers are not familiar with it.
Reality: Factoring has been around for over 4,000 years. In fact, many big name companies have benefited from it, including: 3M Corporation, Best Buy, American Express Company, Motorola Inc., CVS Corporation, and Foot Locker. In addition, factoring is very prominent in the world of staffing because medical facilities routinely take weeks or months to pay their staffing vendors. In most cases, in order for a staffing business owner to utilize a factoring company, the accounts payable clerk who handles the payables just needs to change the remittance address.
Healthcare Staffing Factoring Myth #2: Invoice Funding is an expensive financing option.
Reality: It’s important to consider the fact that a factoring fee is not the same thing as an annualized interest rate. For example, if a factoring firm charges a staffing agency owner 3% per month, it cannot simply be translated into 36% APR. Rather, a factoring firm’s fees stop the day an invoice is paid. Staffing firms do not typically wait 12 months to receive payment on an invoice, so the fee is not nearly as large as one would perceive it to be.
Healthcare Staffing Factoring Myth #3: Factoring requires a long-term commitment.
Reality: Unlike a bank loan, most factoring companies who work with staffing agencies do not require a fixed-term financing commitment. You choose when, who, how much and how long to factor your invoices.
Healthcare Staffing Factoring Myth #4:With factoring, I will lose control over my accounts. Reality: Selling staffing invoices makes it easy for business owners to manage their invoices. Most factoring firms offer their clients access to financial reports weekly or daily. In fact, there are many factors who grant access to a secure online reporting system where staffing entrepreneurs can review purchased accounts and collections in real time via a secure Internet connection.
Healthcare Staffing Factoring Myth #5: The hospitals and nursing homes will think my agency has cash flow problems.
Reality: There are many businesses who use factoring and many medical facilities are already familiar with healthcare staffing factoring. Once alerted of the change in remittance address, healthcare facilities simply view the factor as the agency’s new accounts receivable department.
Healthcare Staffing Factoring Myth #6: The hospitals and nursing homes where I staff will be bothered by frequent collection calls.
Reality: A factoring firm will initially contact an agency’s customer to verify that the invoices are valid. If there is a problem and the staffing factor cannot successfully collect on the invoices, the factor will contact the agency owner to discuss the issue.
Healthcare Staffing Factoring Myth #7: The staffing business model is too complicated for a factoring firm to understand.
Reality: There are many accounts receivable factoring firms that are familiar with this intricacies involved with the staffing industry. As a result of their industry expertise, these factoring firms have specialized funding programs specifically geared towards staffing agencies.
Certainly, reviewing these seven common myths will help staffing agency owners who are trying to piece together the facts about invoice factoring. Hopefully, this article has proven that there are two-sides to every story. You can learn more about managing factoring fears, all it takes is a little research to get started!
**NOTE: This article is a re-printed version of what was also published onFactoringInvestor.com.
For the most part, recourse factoring is the most common and the most affordable nurse staffing financial help available to nurse staffing business owners. In this type of factoring arrangements, the nurse staffing accounts receivable factoring company will require an agency owner to buy an invoice back if the client does not pay within a specified amount of time. Moreover, the nurse staffing agency owner accepts full credit risk for any and all accounts receivables that it sells to the factoring company.
What is nurse staffing non-recourse factoring?
The other accounts receivable factoring option that owners have is non-recourse factoring. In a nutshell, non-recourse nurse staffing financing agreements hold the factor entirely responsible for an unpaid invoices if the following is true:
If the hospital, nursing home or vendor management system (VMS) goes bankrupt during the time an agency owner’s invoice was factored.
If the hospital, nursing home or VMS goes out of business during the time an agency owner’s invoice was factored.
It’s important to keep in mind that non-recourse accounts receivable factoring does not cover the following situations:
Very late payments when there is no insolvency
Disputes/challenges with nurse staffing services
General collections issues
Naturally, both options have pros and cons that an owner should consider before choosing which type of agreement to make. Typically, they will receive lower factoring fees and/or higher advance rates if they choose to enter into a recourse factoring relationship. On the other hand, a non-recourse accounts receivable factoring arrangement buys nurse staffing business owners’ protection if a hospital nursing home or VMS goes bankrupt. Ultimately, agency owners need to review their accounts receivable factoring contract in detail with a lawyer to determine which type of arrangement, recourse or non-recourse, is the best fit for their agency.
The notion of selling allied health staffing receivables to a factoring firm may sound like a difficult concept to understand, but in reality, nothing could be further from the truth.
In fact, there are many companies (i.e. respiratory therapist staffing agencies, radiology tech staffing firms, and physical therapist staffing agencies) that can greatly benefit from all that allied health staffing factoring has to offer. Namely, growing their companies without having to worry about how long it will take for their customers to pay them.
The customer (i.e. hospital, medical clinic, nursing home, etc.) approaches an allied health staffing company to fill an open shift.
If it’s a new customer, the factoring firm performs a credit check on the medical facility and if approved, determines a line of credit for that customer.
The staffing firm provides the medical facility with a temporary employee to fill the shift.
The agency issues an invoice to the medical facility for the shift, making sure to include the factoring firm’s remittance information directly on the invoice.
At any time after the invoice has been issued, the allied health company submits a schedule of accounts receivable for purchase to the factoring firm. In addition to the invoice, this schedule also includes any supporting documentation (i.e. signed time-sheets).
The invoice funding company will contact the staffing agency’s customers from time to time to verify that they are actively using temporary employees from the agency. Upon verification of the invoices, the factor will electronically advance funds within hours.
Per the remittance information included on the factored invoice, the medical facility sends payments directly to the factoring firm’s lock box.
Upon receipt of the payment, the factor remits the difference (reserve) between the collected amount and the advance to the agency, less the discount fee.
Selling invoices to a factor improves the agency’s cash flow, allowing business owners to meet payroll, taxes and other monetary obligations in a timely manner. Thanks to this article, allied health staffing business owners are able to easily familiarize themselves with the factoring process. The next step in improving their cash flow is to start researching which allied health staffing factoring firm will best meet their company’s cash flow needs.
When a medical coding service is considering selling their receivables to a factoring firm, it’s important to familiarize themselves with some common medical coding factoring terminology. This is a quick reference guide outlining some of the more commonly-used factoring terms to help medical coding business owners navigate seamlessly throughout the entire factoring process.
ACH (Automatic Clearing House) – One method factoring companies use to electronically transfer funds into an Account Creditor’s account. When an ACH is initiated, the funds are made available electronically in the Account Creditor’s account on the next business day.
Account Creditor – You, the client and provider of medical coding services.
Accounts Receivable – The money that is owed to an Account Creditor for the services it has provided to customers on credit. The amount indicated on an issued invoice.
Advance Rate – Money provided immediately to the Account Creditor-expressed as a percentage of the total invoice amount. Frequently, factoring firms advance between 70-90% of the invoices it buys.
Account Debtor – The purchaser of medical coding services who is responsible for paying the invoice, (a.k.a. your customer.)
Cash Flow – The measurement of cash coming into a company via accounts receivables and cash going out of a company via accounts payable and payroll.
Collateral – An asset that is promised or given to a funder to guarantee the discharge of an obligation by the Account Debtor.
Discount Fee – A fee assessed by a factor that purchases accounts receivable. Traditionally, the discount fee is determined by the size of the invoice, the length of time it takes to collect the funds and the creditworthiness of the customer.
Face Amount or Face Value – The total amount of an invoice.
Medical Coding Factor – A company that provides operating capital to businesses through the purchase of their invoices.
Medical Coding Factoring – An alternative financing arrangement, in which a factor purchases the accounts receivables of a company, advances a specific percentage of the invoice immediately and then collects on those invoices.
Medical Coding Invoice – A legal debt instrument which indicates the amount due from a customer to pay for delivered medical coding services.
Non-Recourse – The period of time in which the accounts purchased by the factor remain the factor’s accounts and do not revert to the Account Creditor if unpaid due to an insolvency event. The factor accepts full credit risk for any and all accounts that it purchases during this period.
Notification – The process whereby the factoring company communicates to an Account Debtor that an invoice has been purchased from the Account Creditor and that the Account Debtor is to pay the factoring company directly.
Recourse – The period of time in which accounts purchased by the factor are able to revert to the account creditor if unpaid due to an insolvency event. The client accepts full credit risk for any and all accounts that it sells to the factor during this period.
Reserve – Amount of money that is not immediately provided to the company factoring its accounts receivable when the account is purchased by the factor, expressed as a percentage of the total invoice amount. (Advance Rate + Reserve = 100% of Total Invoice)
Reserve Release – The Reserve, minus the discount fee, is transferred by the factor to the client after payment is received.
UCC (Universal Commercial Code) – The laws dealing with commercial business.
UCC-1 – The financing statement (Form UCC1) filed to perfect a security interest in named collateral.
Keeping this medical coding invoice funding terminology guide close by during conversations with factoring firms will help medical coding business owners better be able to speak and understand the “factoring language.” Using this article as a reference also allows medical coding business owners to save time by focusing on asking the right kinds of questions to locate the best medical coding factoring firm for their company.
In an effort to combat the affects of the crumbling economy, service-oriented businesses have been getting creative with new ways to generate money.
Unfortunately for consumers, that creativity often translates into price hikes, additional fees, reduced services or cut backs on productivity. But does it have to be that way?
Take a look at the airline industry. When fuel prices soared last summer, airline giants started charging extra for what were once common courtesy services in addition to the original ticket price. They started with charging for snacks and drinks and then quickly moved onto charging checked bag fees, assigned seat fees, fuel surcharges, curbside check-in fees, etc.
Once the industry giants established that this additional fee policy was going to be part of the standard flight-booking procedures, it didn’t take long for all of the airlines to jump on the “Hidden Fee Bandwagon.” From a customer’s perspective, it seemed as though the airline industry as a whole started seeing dollar signs instead of thinking about its customers needs. Then along came Southwest Airlines with its clear thinking and its “No Fee Policy.”
In some ways, the accounts receivable factoring industry can appear to be a lot like the airlines industry. Both operate world-wide, both industries should be service-oriented, and both industries are notorious for tacking on extra fees in addition to the basic fee. Much like Southwest Airlines, the factoring industry has a handful of healthcare factoring companies who do not charge extra fees in addition to the base fee. This article will discuss three areas where factoring firms might insert hidden fees.
First and foremost, a business owner needs to understand the basics of how a factor charges for its factoring services. It’s important to note that healthcare factoring firms do not loan money; rather, they purchase a company’s invoices at a discounted rate. This discount rate can be a one-time flat fee, or it can vary depending on how long the factor owns the invoice.
In general, discount rates can be affected by a number of things, including the contractual commitment, the average monthly purchase volumes, the average size of the invoices sold, the number of account debtors (customers) that will be factored and the credit quality of those debtors. Variations in each of these will lead to potentially substantial changes in the fee structure. In many cases, factoring firms will have extra fees in addition to their factoring discount fee. More often than not, these “hidden fees” are disguised as set-up fees, administrative fees and penalty fees.
Set-up Fees
There are some factoring companies that start charging fees as soon as a potential client applies for healthcare factoring services. Set-up fees range from a minimal application fee of $25 to a hefty origination fee of $500. In some cases, factors will add in individual fees for due diligence procedures (i.e. running credit and background checks) and legal documentation fees (i.e. assembling legal documents and filing liens). When all is said and done, a new factoring prospect could be $1,000 out of pocket before knowing if he/she has been approved for funding.
When business owners are comparing and contrasting factoring companies, it’s important to inquire whether the factor charges specific set-up fees. Sometimes, the factor will say yes, and sometimes it will say no. It’s up to the business owner to decide whether or not the factoring services outweigh the start-up costs before moving forward.
Administrative Fees
In addition to application, origination and due diligence fees, some factoring firms charge their clients for the time it takes to compile and ship legal documents, billing for postage, long-distance phone calls, photocopying documents and/or time spent on the computer while assisting their clients. There are also fees associated with funding procedures. Most factors will institute set prices for a same-day wire or an overnight transfer of funds.
When a business owner is contemplating the notion of factoring his/her receivables, it’s important to factor any administrative costs into the equation. Without doing so, a business owner could wind up paying a lot more than he/she had initially anticipated.
Penalty Fees
The last way a factoring firm could potentially squeeze in some additional “hidden fees” is when it assigns fees for various “penalties.” Under this umbrella of penalty fees, a factoring firm could designate fees for misdirected payments, early termination of a contract, aged invoices, expedited funding (within 24 hours or less), not hitting a monthly minimum factoring requirement or going over the maximum allowable factoring amount. In addition, a healthcare factoring firm could also penalize its client by holding onto the funds within the reserve account (cash that is owed back to the client once payments have been received).
When choosing an accounts receivable factoring company, business owners should take the time to read all of the terms and conditions before signing on the dotted line. Entrepreneurs should not be afraid to dig deep into the factoring contract and ask a question when something is unclear. Otherwise, those hidden fees hidden fees will reveal themselves at a point where it’s too late to re-negotiate the terms.
So in conclusion, it does appear that the factoring industry is similar to the airlines industry in that players in both are notorious for charging “extra fees.” The plus side to this realization, however, is that both industries also have some players who stand firm in their “No Extra Fee Policy.” The bottom line-much like when shopping for the best airline deal, it’s extremely important to look at the all-inclusive price, including possibly extra fees, before agreeing to do business with an accounts receivable factoring company.
