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Funding for Medical Supply Companies: Banks vs. Factors

Guest post by: Phillip Cohen

Article Overview: When medical supply business owners start comparing invoice funding discounts to bank lending rates, medical supply accounts receivable factoring almost always comes out more expensive. This is because oftentimes medical supply business owners tend to annualize the percentage charged by factors. Unfortunately, when business owners do this, it appears that an invoice funding firm that charges 3% every 30 days is equivalent to a bank charging an interest rate of 36 percent per year. In the world of medical supply business funding, this evaluation couldn’t be further from the truth.

Funding for Medical Supply Companies: Banks vs. Factors

When business owners compare and contrast bank loans to medical supply business funding, it's important for them to keep a few things in mind: 1. A factor does not loan money like a bank does. Banks loan a lump sum and charge an annual interest. On the other hand, a factoring firm purchases accounts receivables at a discounted rate for a short amount of time (between 15-90 days). Because medical supply accounts receivable funding is a type of short-term financing and because invoices typically do not take a year to be paid, it does not make sense to annualize the percentage rate.

2. Moreover, a medical supply factor is continuously advancing and collecting accounts receivable, compared to a bank that provides the money only one time, the day that the loan is received. An medical supply accounts receivable funder has the ability to grow as its clients grow. Once a company uses the funds from a bank loan or exceeds its credit limit, there's no room for it to grow.

3. Banks approve business loans or lines of credit based on a medical supply company's historical operating and financial performance, compared to a factor whose main criteria is the creditworthiness of a prospect's customers. Banks tend to shy away from medical supply business owners who are just starting up, going through seasonal growth, have bad personal credit or have too much concentration of their sales with one or two customers. Most factors are able to look past the above criteria because their decisions are based off of a prospect's customers' ability to pay.

4. The loan process with a bank is time-consuming and cumbersome, and it could take months to receive the loan proceeds. Whereas a factoring firm's application and approval process can take as little as a week, and medical supply business funding firms have an ongoing ability to approve additional lines of credit quickly.

5. Oftentimes, a bank loan requires upfront collateral in addition to a medical supply company's accounts receivables. The only collateral that a factor requires is the company's accounts receivables. Moreover, a bank will most likely require business owners to personally guarantee the loan as well. Whereas, factoring companies won't always require a personal guarantee prior to advancing funds on receivables.

6. Taking out a business loan creates debt on a company's balance sheet, and credit ratings go down because of loan limitations. On the other hand, factoring increases credit ratings by creating better cash flow for medical supply companies and it helps them pay their bills promptly.

When looking at the big picture, entrepreneurs have to weigh the costs of invoice funding against not having immediate cash. More often than not, the decision comes down to either selling their accounts receivable or putting up with crippling cash flow problems and missed sales opportunities.

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Article Tags: accounts receivable factoring, accounts receivable financing, factoring accounts receivables financing, invoice factoring, medical billing factoring, medical billing funding, medical collections, medical factoring, medical receivables factoring, professional collections



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