Dentists face a variety of daily challenges, from staying ahead of new techniques to marketing their practices to face increased competition. Maintaining an adequate level of dental practice working capital doesn’t have to be a problem because dental invoice factoring stabilizes cash flow.
Most people view dentists as “rich” and would have no need for financing in the short term. While most dentists make a good living, cash flow can often be an issue due to the time it takes to collect from third party payers such as insurance companies and federal and state programs. The wait can be up to 120 days, while payroll, rent, and other operating expenses must be paid sooner. This imbalance of payments versus collections can cause a serious problem with the practice’s working capital position. Dental receivables factoring balances cash flow and provides the funds to make payments in a timely manner and grow the practice.
Why use dental bill factoring instead of just going to the bank?
Most banks are wary of lending against dental or medical receivables due to the complexities of collateral. Medical and dental billing is not like other industries due to the variation in what is actually charged. Each insurance company may have a different contracted rate. In other words, a procedure billed at $8,000 can result in a claim of $4,000 from one insurance company and $5,000 from another. Banks are likely to be very conservative in how much they lend on accounts receivable. With dental bill factoring, the amount of financing is only limited by the pool of third-party receivables that have been generated. Banks can also offer dental working capital loans, but they are usually limited to $100,000 and are usually used for a specific purpose, such as debt consolidation or expansion. Loan types are more difficult to obtain, requiring a minimum credit score of 685 and a track record of practice profitability. Factoring is used to provide working capital on an ongoing basis, and qualifying for this type of financing for dentists is not dependent on the dentist’s credit scores or the practice’s performance.
How does dental bill factoring work?
The dentist first fills out an application, which asks several questions about the practice. Other information is required, such as articles of incorporation and an accounts receivable aging schedule. Once the factoring company reviews the application and determines that the practice appears to be a viable candidate for financing, a letter of intent (LOI) is issued setting out the terms and conditions of the relationship. These terms include the advance rate (the amount of cash given to the provider as a percentage) of each invoice and the fees that will be charged. Once the dentist accepts the letter of intent, a contract is generated and a due diligence audit is scheduled. The audit is necessary for the factor to determine the average net collectible percentage and the adequacy of the practice’s billing system. Once the contract is executed and the audit is complete, the dental professional can begin to send invoices for financing normally on a weekly basis. The factor will advance the contracted rate and immediately transfer the funds to the practice’s bank account. At the time of collection, the difference between the amount collected and the amount advanced is remitted to the practice, less the amount of the fees associated with the financing. At this point, the transaction is closed.
Dental invoice factoring is a great way for dentists to acquire the ongoing cash flow they need to keep up with operating expenses and grow the practice to the next level.