No matter what businesses do, many times owners find the money generated by the services they offer or products they sell gets stuck within their business. For example, when a bill is issued for products sold or services rendered and the client is offered time to pay, the credit that has been extended is represented by an accounts receivable on the firm’s balance sheet. As such, money is earned but not able to be used by the business until full payment is received. Time gets wasted tracking down late payers instead of spending your valuable resources on your business. Accounts receivable financing can be very beneficial unlocking funds for many businesses.
Accounts receivable financing, also known as factoring, entails selling a receivable to a source of funds, or a factor, and they absorb responsibility for collecting the debt. Despite the many advantages of factoring, it is often not well understood and many myths exist. For example, common myths are that only troubled companies use factoring, and, another, that clients will have a negative perception of firms that fund their operations in this way. Nothing could be further from the truth. Large companies the likes of Walmart and Lowes use factoring and customers really could not care less about whom they pay for their products or services.
Accounts receivable financing differs from merchant cash advances and bank loans. Banks rely on the ability on the client to pay, while factors rely on the client’s customer’s ability to pay. Merchant cash advances are paid back through a portion of future receivables, whereas accounts receivable financing provides funds that are never paid back.
Factors can be either recourse or non-recourse lenders. Non-recourse is best since the factor absorbs all the risk involved in collecting the debt as opposed to sharing the risk with the client. Included in their fee, non-recourse factors essentially become the client’s credit and collections management agency.
Medical and law firms are particularly well-suited for this financing method. Law firm factoring can cover all the costs a firm might incur such as expert witness fees, case preparation costs, and can also provide the funds necessary to take on new cases. Factoring can provide medical firms the funding they need to absorb long reimbursement periods by government entities including Medicare and Medicaid.
At D.P. Martone Capital, we differentiate ourselves from other factors. We have partnered with one of the very few companies that purchases medical firm receivables and the only company that provides non-recourse lending to medical and law firms.