In my last article, I briefly introduced accounts receivable factoring as a viable financing option for nurse staffing agencies who are just starting up or who are in the midst of a rapid growth period. Rather than waiting weeks or months to be paid, a healthcare staffing company can receive cash immediately by selling its invoices at a discounted rate to a factor.
I went on to explain the three main categories of factors: general factors, who are large and operate nationally, accepting clients from a multitude of industries; geographic factors, who specialize in funding clients who are proximal to the factor’s location; and industry-specific factors, who base their clientele around one specific business niche (i.e., healthcare staffing financing). PRN Funding is an example of an industry-specific factor because we focus on healthcare staffing invoice funding, namely for medical staffing agencies, medical transcription services, medical coding companies and medical supply businesses.
After deciding which kind of factor would be the best fit for your agency, the next logical question is, “How much does healthcare staffing factoring cost?” Before jumping in blindly and talking numbers, it’s a good idea to have a general understanding of how the factor’s fees are structured. Allow me to elaborate.
Discount Fees. When a factor advances you money on your receivables, they are actually making a legal purchase of your invoices at a discounted rate. This discounted rate can be a one-time flat fee, or it can vary depending on how long the factor owns the invoice. It’s important that you know upfront how the factor determines its fees to make sure that you are getting the best deal for your invoices. And of course, it all boils down to how your own company operates, how long it takes for your customers to pay your invoices and what you feel comfortable paying. In general, discount fees can be affected by a number of things, including the length of the contract to which you are willing to commit, the average monthly purchase volume of your account, the average size of your invoices, the number of account debtors (customers) you do work for and the credit quality of those debtors.
Advance Rates. You should also consider the factor’s advance rates. Advance rates are the amount of money that a factor advances you up front upon purchasing your invoices. Currently, the industry norm is 80 percent. Of course this rate can vary, and oftentimes factors determine their advance rates on a client-by-client basis. Most factors ask that you provide a current accounts receivable aging report during the approval process to see how long it takes for your customers to pay and if they generally pay in full. Quick payments and payments made in full will increase your chances of having a higher advance rate. In addition, some factors will increase the advance rate over time as your business grows and the factoring relationship solidifies.
On the other hand, if your customers routinely short-pay or take longer to pay, your advance rate most likely won’t be as high. For example, some hospitals insist that all of their employees take a 30-minute lunch break. Even if a temporary nurse works through his/her lunch break, and the nurse staffing agency ends up paying him/her for that 30 minutes, the hospital will not pay for that portion of the invoice. Another example occurs when you sign a contract with a hospital that is net-60, and the hospital is notorious for paying 30 days late. Since it becomes harder to collect on invoices the longer they go unpaid, a factor that knows your clients pay in 90 days will not feel as comfortable advancing you a high amount on your invoices.
Of course there are both positives and negatives for high and low advance rates. For example, a factor advancing 95 percent upfront will probably charge higher discount fees, but you have the benefit of receiving funds for the entire invoice amount. On the other hand, a factor that advances 75 percent will charge lower discount fees, but you won’t be able to receive as much money up front.
Extra Fees. I should mention that there are also numerous other possible “extra fees” a factor could add into their fee structure. Some examples of these fees include application, origination and due diligence fees. These charges are often to cover the costs of running credit and background checks on your customers, compiling and shipping legal documentation and putting a lien in place once you become a client. Other factors will add in administrative fees for postage, long-distance phone calls, or computer time. Then there are fees associated with funding procedures, identifying set prices for a same-day wire to your bank account or an overnight transfer of funds. Most of the remaining costs can be bunched into the category of “penalty fees,” for misdirected payments, aged invoices or an early termination of your contract.
Although advance rates and discount fees tend to be the main concern when business owners are shopping factors, I hope this article has helped you realize that there are other types of fees that may or may not be tacked onto your healthcare staffing funding deal, depending on the factor. In addition, like I stated in the previous article, depending on the volume your company is invoicing on a monthly basis, where you are located and how much of a niche you have in the medical staffing industry will all play a crucial role in your overall decision-making process.
If you need healthcare staffing invoice factoring, I encourage you to read the third and final article in this series to explore the legal documentation involved with a factoring deal. The length of time you are willing to commit to selling your invoices as well as the type of guaranty you are willing to sign are important aspects to consider when looking for the factor who will best be able to meet your healthcare staffing company’s needs.