Establishing Best Practices for Extending Credit in Today's Economy, Part 1

by Dr. Bruce B. Baird

Successful dental practices use customer financing to maintain and grow their sales, especially for patients that may need costly, but critical elective services. Like accepting different forms of payment, such as credit cards, extending credit is becoming more popular as another method to help close a sale, while enabling patients to financially secure services they would otherwise not be able to afford.Unfortunately, given the current tighter credit standards and the increase in consumers with FICO scores under 650, access to financing has become significantly limited, making the financing that is available more expensive for businesses, such as dental practices. For example, approval rates for traditional financing through credit cards or lending institutions have seen a significant double-digit decline, causing many patients to forego nonessential elective health-care services and creating a significant revenue decline for health-care providers, such as dentists.The credit crisis has also impacted many other B2C industries, such as education, legal, home improvement, luxury goods and services, and others that suffer from the lack of effective third-party financing.DIY - Extend Your Own CreditThe choice for many dental practices is between offering their own payment terms or doing nothing, forgoing the much-needed revenue and crossing their fingers that the economy will improve soon.As a result, many are now turning to extending credit via internally funded payment plans as a way to close the gap and create a "win-win" for their business and their customers.Extending credit through payment plans is hardly a new concept. In fact, for a variety of businesses, this is an accepted and well understood practice that has helped them grow their sales and maintain customer loyalty. And, more importantly, it has helped these businesses establish a steady cash flow.Today, many dental practices considering a program to extend credit through offering their own payment plans have little experience in setting them up. Others that already offer credit through payment plans struggle with manual processes that are time-consuming and error-prone. For both, we recommend establishing credit practices using a "best practices" approach.Establish a purpose for extending creditCredit terms enable patients to focus less on prices, enhance patient relations, and have the potential to generate greater acceptance of major treatment plans.. But before jumping in, the question needs to be asked: "Is it necessary to extend credit to maintain or increase production?" Answering this question helps to define the purpose for an effective credit program. It also can establish milestones for measuring the program's success.Extending credit is an effective way to close the financing gap and give you more control. This is especially true if approval rates have dropped or discount fees have increased from your existing third-party lender.The same is true if your competition offers patient financing and you don’t. The availability of patient financing is an important buying criteria for many consumers, particularly for larger ticket services, and especially in today's economic climate.Assuming the answer is "yes" for your dental practice, you need a plan for how to extend credit effectively and efficiently. This plan will also help to get you and your practice on the path to success with extending credit to your patients.How to extend credit effectively and efficientlyAccording to a 2008 survey conducted by GfK Roper Public Affairs and Media, when faced with a medical expense over $1,000, one out of 10 people surveyed stated that they would seek a payment plan/monthly payments from the service provider to help in paying the expense. This was before the impact of the credit crisis was really felt by the general population. Today, one can assume — if asked the same question again — that a higher percentage of people would seek payment assistance in the form of a payment plan. If your dental practice recognizes the need to extend credit terms to your customers, you probably also realize that it would be a good idea to have a plan in order to execute it successfully and avoid unnecessary repayment risk. Here’s how to get started.Develop a written planA plan defines the goal behind offering credit terms, a road map for everyone to follow in executing the plan, as well as the metrics to measure its success. Putting it down on paper forces you to really think about what is involved, offers you the ability to get valuable feedback before implementing, and allows you to share it with everyone on your team. This ensures that it is properly executed.Understand lending and privacy compliance requirementsExtending credit terms is lending and is, therefore, subject to a number of state and federal consumer lending and privacy laws and regulations. It is a best practice to seek out professional advice to understand your role and obligation regarding these laws and regulations. Topics to cover include collecting and handling personal information from applicants, making credit decisions, using a credit agreement, collecting payments, handling missed payments, and use of outside collections services. There is a lifecycle to extending credit with many steps along the way. Minimizing risk associated with compliance, while at the same time ensuring a positive experience for your patients, requires some planning across the entire lifecycle. Automation across the entire lifecycle can greatly simplify compliance and dramatically reduce the overall risks involved extending credit successfully.Formalize credit processesFormalizing the various processes involved in extending credit aids in compliance, ensures that credit criteria are applied consistently for all applicants, and creates written documentation needed to process and enforce the credit agreement with the borrower. Specific areas to consider include the application process, the credit application and credit agreement forms, borrower communications, document retention and record storage polices, credit evaluation and approval, missed payment policies, and default resolution. Automation and written guidelines for staff to follow are best practices to achieve these objectives.Effective automation is the keyWhen you hear or read stories about businesses that have had negative experiences with extending credit to their patients, it is often because they weren't organized and didn't apply best practices to the overall process. Unfortunately, even in cases where good procedures and policies are defined, execution using manual processes often proves time-consuming and error-prone. When staff turnover is factored into the equation, applying best practices to extending credit becomes more difficult.Effective automation of the entire lifecycle is the key to success. Supported by written policies and procedures, it greatly reduces risk by simplifying compliance, enforcing best practices, eliminating manual processes, enforcing consistency, and providing business intelligence at every stage of the lifecycle and across all credit accounts. Effective automation makes it possible for even small businesses, such as dental practices with limited staff, to be highly successful extending credit to their patients.In Part 2 of "Establishing Best Practices for Extending Credit in Today's Economy," we will explore best practices for creating new payment plans in more detail, including deciding what types of customers are eligible for credit.