Medical Coding and Billing
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Part Two of Two by PRN Funding

How Medical Billing Services Can Improve Their Cash Flow

In my last article, I briefly introduced accounts receivable factoring as a viable financing option for medical coding services who are just starting up or who are in the midst of a rapid growth period. Rather than waiting weeks or months to be paid, a medical coding company can receive cash IMMEDIATELY by selling its invoices at a discounted rate to a factor.

I went on to explain the three main categories of factors: general factors that are large and operate nationally, accepting clients from a multitude of industries geographic factors that specialize in funding clients who are proximal to the factor's location and industry-specific factors that base their clientele around one specific business niche. After deciding which kind of factor would be the best fit for your medical coding service, the next logical question to ask is, “How much does it cost?” Before jumping in blindly and talking numbers, it's a good idea to have a general understanding of how the factor's fees are structured. Allow me to elaborate.

How Factoring Works...

When a factor advances you money on your receivables, they are actually making a legal purchase of your invoices at a discounted rate. This discounted rate can be a one-time flat fee, or it can vary depending on how long the factor owns the invoice, whereby the factor charges a certain percentage corresponding to the number of days that it takes for the invoice to be paid. It's important that you know upfront how the factor determines its fees to make sure that you are getting the best deal for your invoices.

Of course, it all boils down to how your own company operates, how long it takes for your customers to pay your invoices and what you feel comfortable paying. In general, discount fees can be affected by a number of things, including the length of the contract to which you are willing to commit, the average monthly purchase volume of your account, the average size of your invoices, the number of account debtors (customers) you do work for and the credit quality of those debtors to name just a few variables.

Among some other things to consider in addition to discount fees are the factor's advance rates. Advance rates are exactly what they sound like, the amount of money that a factor advances you up front upon purchasing your invoices. Currently, the industry norm is 80 percent. Of course this rate can vary, and oftentimes factors determine their advance rates on a client-by-client basis.

There are a number of aspects that could affect your advance rate, and they frequently depend on your customers' payment history. In fact, most factors will ask that you provide a current accounts receivable aging report sometime during the approval process to get an idea of how long it takes for your customers to pay and if they generally pay the invoices in full.

Quick payments and payments that are made in full will increase your chances of having a higher advance rate. In addition, some factors will increase the advance rate over time as your business grows and the factoring relationship solidifies.

On the other hand, if your customers routinely short-pay on your invoices or if they take longer to pay, your advance rate most likely won't be as high. For example, when you sign a contract with a hospital that is net-60, and the hospital is notorious for paying 30 days late. Since it becomes harder to collect on invoices the longer they go unpaid, a factor that knows your clients pay in 90 days will not feel as comfortable advancing you a high amount on your invoices.

Of course there are both positives and negatives for high and low advance rates. For example, a factor advancing 95 percent upfront will probably charge higher discount fees, but you have the benefit of receiving funds for the entire invoice amount. On the other hand, a factor that advances 75 percent will charge lower discount fees, but you won't be able to receive as much money up front.

I would also like to mention that there are numerous other possible fees a factor could add into their fee structure. So before making your decision based on the advance rate and discount fee alone, make sure to look into the factor's extra fees. Some examples of “extra fees” that a factor may charge include application, origination and due diligence fees. These charges are often set in place to cover the costs of running credit and background checks on your customers, compiling and shipping legal documentation and putting a lien in place once you become a client.

Other factors will add in administrative fees for postage, long-distance phone calls, or computer time. Then there are fees associated with funding procedures, identifying set prices for a same-day wire to your bank account or an overnight transfer of funds. Most of the remaining costs can be bunched into the category of “penalty fees,” in which a factor could charge you more for misdirected payments, aged invoices or an early termination of your contract.

Although advance rates and discount fees tend to be the main concern when business owners are shopping factors, I hope that this article has helped you realize that they are not the only two things to consider. There are a number of other types of fees that may or may not be tacked onto your funding deal, depending on the factor. In addition, like I stated in the previous article, depending on the volume your company is invoicing on a monthly basis and where you are located will all play a crucial role in your overall decision-making process.

I encourage you to read the third and final article in this series to explore the legal documentation involved with a factoring deal. You will find that the length of time you are willing to commit to selling your invoices to a factor as well as the type of guaranty you are willing to sign are important aspects to consider when looking for the factor who will best be able to meet your medical coding service's needs.

 

PRN FUNDING Provides Immediate Cash Flow!

Attention!   Read Medical Billing Business Cash Flow




About PRN Funding:
Philip Cohen is the founder and president of PRN Funding, LLC, which is an extraordinarily focused niche player in the health care services funding market place. Through a process known as factoring, PRN Funding provides medical coding business owners with the financial resources needed to grow and effectively compete in the industry. Contact Philip Cohen at toll-free 866.776.5407, or via email at info@prnfunding.com. Please visit PRN Funding, LLC on the web.

 
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