Accounts Receivable Financing
for
Pharmacies and Drug Stores

Accounts Receivable Financing is also known as A/R Finance, Cash Flow Financing, and Factoring. Accounts Receivable Finance is the process of converting the pharmacies outstanding billings into immediate cash. Instead of waiting to get paid and having uncertainty regarding when the money will arrive, a cash flow financing program allows for cash to be received in a planned and consistent manner.

Pharmacy sales continue to grow, but with the current economic conditions and many states having financial difficulties themselves, the cash in-flow to some pharmacies and drug stores has slowed down. By selling the billings the pharmacy is able to obtain their cash at a faster pace. Cash flow problems can occur for growing businesses and is not just an issue for companies with declining sales.

By setting up an account with a finance company that handles medical/pharmacy billing receivables a pharmacy will now have a financial solution to cash flow problems. Pharmacies and drug stores that sell their receivables do not create debt. A/R Finance is off balance sheet financing.

Benefits of Accounts Receivable Financing:
1. Turn 30, 60, 90 day collections of pharmacy billings into immediate cash.
2. Pharmacy payables don’t have to be delayed.
3. Can take advantage of vendor 2%/10 discounts.
4. For inventory that turns quickly buy in larger bulks for better pricing.

How Accounts Receivable Financing Works:
Once an account is set up with a finance company that specializes in medical/pharmacy accounts receivable financing then daily, weekly, or monthly payments can be established. The pharmacy sends the finance company the batch of billings, and the finance company sends the pharmacy the funds. The funds are an advance payment of the billings. Note that the advance is not 100% of the billing. The finance company keeps their fee - the discount rate. Contracted reserve amounts are also not paid at this time.

When a pharmacy sells their billings to a finance company they are paid quicker than waiting for the insurance company or government agency to pay. In order for the finance company to make money for advancing the cash, they charge a fee which is usually a percentage of the invoice. This fee is called a discount rate. Many pharmacies have not considered selling their invoices to increase their cash flow and this could be due they either don’t understand it, or they have the expectations the discount rate for factoring is to high.

Consider the example below and do some calculations yourself using a discount rate between 2%-5%, and an advance of 70%-80% to determine if selling your receivables is a financially sound decision for your pharmacy.

Example when pharmacy billing is paid within 30 days:
$500.00    Total Billing Amount.
$400.00    80% advance paid to you in 48 hours.
$100.00    20% reserve held by the finance company.
  $12.50    2.5% fee of total billing amount deducted from reserve.
  $87.50    Balance of the reserve paid to the pharmacy.
$487.50    Total amount received by the pharmacy.

The amount of the advance and the fee charged will vary depending on the strength of the Payor and the typical amount of time it takes them to make the payment.

Deciding to use A/R Finance with your pharmacy business:
1. Is inventory, payroll, or other expenses expanding faster than you are collecting your cash?
2. Will the increased cash flow increase profits?
3. Has the bank said no to a bank loan or line of credit?

Tips regarding pharmacies and cash flow financing:

1. Fees charged by the finance company vary depending on how long it takes the insurance company or government agency to pay. Instead of lumping all customers together in a single batch, have your usually quick paying customers in one batch, and then save the slower payers for later batches. By allowing the slower invoices to season for a few days on your desk, you can time the submission of the slow batch so it doesn’t sit on the Funders desk for more than 30 days.

2. Weigh the costs of factoring, but also include the profit benefits in your analysis. The profits come from being able to take advantage of vendor discounts such as 2%/10, reduced interest payments, or other factors when you are able to pay your bills quicker. If it will cost you more than it benefits you - don’t do it. If your analysis shows that selling the pharmacies accounts receivables increases cash flows and profits then this is a financial tool you should consider.

3. Not all banks or finance companies will factor pharmacy receivables, and for those that do - the rates will vary. Pharmacies that work with finance companies that specialize in medical billing will receive better responses.

When you have questions, or want to learn more about accounts receivable finance and how a pharmacy can benefit from using this financial tool complete Washburn and Associates web form regarding Pharmacy Accounts Receivables.