Financing Medical Offices, Nursing Homes, and Other Healthcare Businesses

Although companies in the healthcare industry have seen a rise in demand, they have also experienced a rise in financial problems. These problems stem from the fact that most healthcare businesses have a number of immediate expenses. Unfortunately, attending to patients is expensive. The healthcare provider must pay for:

  • Office space or a clinic
  • Day-to-day expenses
  • Salaries
  • Supplies
  • Vendors
  • Equipment

On the other hand, most medical providers get their revenues from third-party medical insurance companies, Medicare, and Medicaid. The problem with this arrangement, aside from low payments, is that most insurance carriers pay slowly. They can take 60, 90, or even 120 days to pay insurance claims. As a healthcare provider, this delay means that you must have the financial resources to cover all your operating expenses until payment – and payment could take months.

As you can see, it’s pretty difficult to start a business in the healthcare industry and not run into cash flow problems. This does not mean that healthcare businesses are not profitable. Some aren’t, but many are. However, you have to manage your business efficiently and keep track of your finances.

Conventional financing options

One way to solve some of these problems is to use conventional financing. In many cases, this will be your only option. You can get conventional financing through banks, lending institutions, and brokers. However, you may have better luck with a government guaranteed loan, such as an SBA 7a. With these loans, the government provides a guarantee to the lender in case you don’t pay. This guarantee makes these loans attractive to banks.

However, banks still underwrite these loans conservatively. Getting this type of financing is easier – but not easy. Also, the process takes time and requires substantial documentation. By the way, for small amounts (under $30,000), you should consider a Microloan.

Solving the root cause: Improve cash flow

There is a different approach, however. The biggest challenge for many healthcare businesses is simply cash flow. They have financial problems because they cannot afford to wait up to five months for a payment. If insurance claims were paid quickly, the problems would disappear. This type of problem is common for:

  • Medical offices
  • Clinics
  • Diagnostic centers
  • Durable medical equipment (DME) providers
  • Nursing homes

One way to fix this problem is to finance your medical receivables. This solution can provide many of the benefits you’d get from quick payments, without actually requiring insurance companies to pay sooner. It works by partnering your business with a finance company, who provides funding using medical claims as collateral. The transaction settles once the insurance carrier, Medicare, or Medicaid pays for the claim.

Most transactions are financed in two installments. The first installment is wired as soon as the claims are submitted and covers 60% to 75% of the net payable value of the claims. The following diagram explains how this transaction works:

medical factoring

The transaction settles once the insurance company pays the claims. The settlement amount covers any funds that were not advanced, less the finance fee. The following diagram explains how the transaction settlement works in medical factoring:

medical factoring transaction settlement


As a rule of thumb, medical factoring lines are often more expensive than conventional financing options. This expense is due to the fact that medical factors don’t underwrite transactions using banking underwriting rules. Instead, they focus (almost exclusively) on the credit strength of the companies paying your insurance claims. From an underwriting perspective, the transactions they finance are riskier and, therefore, more expensive. Costs vary between 2% and 4% per 30 days.

Advantages of medical factoring

This solution has three distinct advantages. First, it can be used by new companies that don’t have an extensive operations history. In some cases, it can be used by startups as long as they have some track record with the insurance company. Second, the underwriting process is quick. You can often get funded in a week or two. And third, the line is not fixed and can grow with your business.

Disadvantages of factoring medical receivables

There are two disadvantages of this solution. The first one is cost, which we have already discussed. The solution is expensive and will work only with healthcare providers that have healthy profit margins. The second one is that it only solves one financial problem: cash flow issues due to slow-paying insurance companies. Factoring does not solve other financial problems.

Additional resources

If you would like to learn more, you can find some additional resources here. You can also watch how a transaction works in this video, that explains medical factoring. Keep in mind that the video is a simplified version of this article.