Financing a Pharmacy with Medical Factoring

Most independent pharmacies operate in a challenging, competitive environment. On one hand, they face strong competition from large pharmacies and discount chains. On the other hand, they face payment pressures from insurance companies that want to reduce the value of each claim, and pay it slower.

Often, this pressure leads to cash flow problems since few pharmacies can afford to wait long for a payment. In this article, we discuss how to solve this problem and improve your cash flow.

Is a business loan the answer?

In short, usually not. When confronted with this problem, many owners initially believe that the best way to fix the problem is to get a pharmacy business loan. While this approach can work, a business loan has some drawbacks.

Most business loans are hard to get. Banks have strict collateral rules and need to see the pharmacy’s, and its owner’s, underlying collateral. They can only finance pharmacies that have strong collateral. Also, the process often takes weeks, or months. Furthermore, the results are far from certain.

However, the main drawback is that business loans are not always the best way to deal with cash flow problems.

How does medical factoring help?

Medical factoring allows you to finance your slow-paying medical claims. Instead of waiting 30 – 120 days to get paid, you get an immediate cash infusion from the finance company. This payment usually eliminates the cash flow problem and gives you the operating capital you need to pay for expenses and grow the pharmacy.

Pharmacies that use medical receivables factoring often finance claims as a batch on a weekly or bi-weekly basis. This strategy provides them with ongoing working capital and helps ensure a smooth operation.

How does medical factoring work?

Medical claims are financed in two installments: the advance and the rebate. The advance is provided as soon as you submit the claims. It covers 75% – 80% of the net payable claim value. The remaining 20% – 25%, less the fee, is rebated once the claim is paid by the insurance company.

Medical factoring works as follows:

  • You submit a batch of claims to the medical factoring company
  • 75% – 80% of the claim’s value is deposited to your bank account
  • The claims pay after 30 – 120 days
  • The remaining 20% – 25%, less the finance fee, is deposited to your account

How are Medicare and Medicaid payments handled?

Medicare and Medicaid claims can also be handled through medical factoring, though they require a special process. Usually, the account you use for payments is converted into a control account (also known as a sweep account). Payments are deposited into that account normally, but the control feature allows the factoring company to settle transactions. Note that this process varies.

Advantages of medical factoring

This solution is specifically designed to help pharmacies that have cash flow problems due to slow-paying medical insurance claims. Consequently, your cash flow improves quickly, usually as soon as you start using medical factoring.

Additionally, qualifying for medical factoring is easier than qualifying for a business loan. The process is also faster, as most lines can be set up in a week or two.

Final thoughts

A medical receivables factoring line can be a useful tool for independent pharmacies that have cash flow issues. It can also work well with compounding pharmacies due to their higher profit margins. For more information, please fill out this form or call us toll-free at (877) 300 3258.