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Cash advance: Should you sell your accounts?

Accounts receivable financing can get you money in a hurry. But it comes with a price.

By Katherine Vogt, amednews staff. Jan. 30, 2006.

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Payroll is due. Vendors are sending you bills. Your office rent is late. You need to come up with a substantial amount of cash, and soon.

But you are waiting, and waiting, and waiting, for third-party payers to furnish you with the income that enables you to meet these obligations.

It's a problem endemic to medical practices, and one that has forced an ever-increasing number of them to turn to a controversial strategy: accounts receivable financing.

There are plenty of banks and other lenders all over the country -- and all over the Internet -- who are willing to take your accounts receivable in exchange for a quick cash payment up front that might enable you to pay off your debts, buy equipment or otherwise invest in your practice. Some even might tell you that it will provide asset protection in a liability case.

But like most other things that sound too good to be true, there are catches.

For one thing, practices that take out loans or lines of credit against their accounts receivable might be paying a higher interest rate than in other types of lending. And those that sell their receivables to a third party in a transaction known as "factoring" should expect only about 80 cents on the dollar for the value of those accounts. Also, some experts say getting payments now against future income can create a vicious cycle that is difficult to stop.

"If you give up your accounts receivable, you get to buy your piece of equipment and expand. But how are you making your payroll next week?" asked David Scroggins, a management consultant at Clayton L. Scroggins Associates in Cincinnati.