Is Medical Factoring Too Expensive?

Lenders offering traditional loans and asset based loans will usually tell a prospective borrower to use their product, because “factoring is so expensive.”

“Expensive” is a concept that cannot be taken out of context, as it is derived from the comparison of many different variables. For example; is a $50,000 car too expensive? That cost may be out of my budget and I may not be able to afford that vehicle, but we cannot determine if that price is low, average or expensive. That depends on the vehicle itself and what its market value truly is. Paying that price for a new, no-frills, base-model Camry, seems to be way too expensive since the market value for this vehicle is about $$26,000. Paying $50,000 for a brand new Jaguar XJ series is probably about $30,000 below the market price for that car. We certainly cannot call the price in this example as expensive.

The cost of medical factoring is simple to determine. It is essentially the discount fee charged. If a medical factoring transaction is priced at a 3% discount, then the cost of factoring to the medical provider is 3% of net billing. Now, is that expensive? If other medical factors are charging similar discount fees, then it is not expensive, it is market value. If a bank (or other lender) is charging 10% annual interest on a loan and the amount of funds given by the bank is ample to provide the cash flow needed, then the bank is a less costly product and not necessarily “less expensive” than factoring. The issue arises however if there is no traditional funding available due to the medical provider not having financial statements strong enough to withstand bank or traditional lender underwriting (in this environment this is usually the case). Now the only question is; do I give up 3% of my bottom line to the factor, in order to grow my practice? As long as there is ample margin to sustain the cost, the answer is yes. It is very well understood that factoring usually stimulates and supports growth. SO….what was the real cost if we increase our business by 25%-50%? In this case it would have been too expensive NOT to factor!