Dentists face a variety of day-to-day challenges, from staying on the cutting edge of new techniques to marketing their practices to meet increased competition. Maintaining an adequate level of dental practice working capital does not have to be a problem because dental invoice factoring stabilizes cash flow.
Most people view dentists as “rich” and would have no need for short term financing. While most dentists earn a good living, cash flow can often be an issue because of the time it takes to collect from third-party payers such as insurance companies and federal and state programs. The wait can be as long as 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 working capital position of the practice. Dental accounts receivable factoring brings cash flow into balance and provides the funds to make payments in a timely manner and grow the practice.
Why use dental invoice factoring instead of just going to the bank?
Most banks are leery of lending against dental or medical receivables because of the complexities of the collateral. Medical and dental billing isn’t like that of other industries because of the variance in what is actually collected. Each insurance company may have a different contracted rate. In other words, a procedure billed out at $8,000 may result in a collection of $4,000 from one insurance company and $5,000 from another. Banks will likely be very conservative as to the amount they lend on receivables. With dental invoice factoring, the amount of funding is only limited by the pool of third party receivables that have been generated. Dental working capital loans can also be offered by banks, but are typically limited to $100,000 and are typically used for a specific purpose like debt consolidation or expansion. The types of loans are harder to get, as a minimum of a 685 credit score and a track record of practice profitability is required. Factoring is used to provide working capital on an ongoing basis and the qualification for this type of dentist financing is not dependent on credit scores of the dentist or performance of the practice.
How does dental invoice factoring work?
The dentist first fills out an application, which asks various questions about the practice. Other information, such as the articles of incorporation and a receivables aging schedule are required. Once the application is reviewed by the factoring company and it’s determined that the practice appears to be a viable candidate for financing, a letter of intent (LOI) is issued which states the terms and conditions of the relationship. Such terms include the advance rate (the amount of cash given to the provider on a percentage basis) of each invoice and the fees to be charged. Once the letter of intent is accepted by the dentist, 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 completed, the dental professional can start submitting invoices for funding on typically a weekly basis. The factor will advance the contracted rate and immediately wire the funds into the practice’s bank account. Upon collection, the difference between what is collected and the amount advanced is remitted to the practice, less the amount of fees associated with the financing. At this point, the transaction is closed.
Dental invoice factoring is an excellent 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.