It’s time to confront a hard and uncomfortable truth: extending credit comes with risk. Even with best practices employed across the board, every payment plan carries the risk of a loss. The more your practice relaxes approval standards to accept more business, the larger the risk.
We have doctors in our network who employ hard and stringent credit requirements, only providing payment plans to the safest candidates. As a result, their number of approved procedures is small, but so is their hard default rate. On the flip side, there are gung-ho practitioners with more relaxed requirements who approve nearly everyone who walks through the door. While their default rates are higher, the revenue and profit stream from the procedures and interest on the plans make the ends justify the means.
One of the most important decisions one can make when establishing an in-house financing program is picking a comfortable place on the risk/reward spectrum. However, the great advantage of creating your own in-house program is that once that decision has been made, modern technological tools make it easy to set-up and automate your program based on the parameters you’ve established.
The very beginning of the process — evaluating a potential customer — should begin with set parameters on a number of factors. Modern automated software can run credit, banking and fraud checks at the click of a mouse, and that mouse click may very well be the end of the evaluation for our more safety conscious lenders. If all the numbers meet a pre-set minimum, then it’s time to schedule the procedure and set the payment plan! Those that meet the set standard will carry the smallest default risk, making this system a safe bet for those looking to book a few extra procedures a month.
However, our more “aggressive” doctors know full well that in today’s credit environment this hard threshold is only a small part of the picture, and can easily exclude many individuals who are more than capable of paying off their loans. As we discussed in our previous post on Origination Workflow, an administrator with override capabilities can make final approval decisions based on a number of factors much deeper than those mentioned above. In these cases, the terms of the loan can be customized to include higher down payments and interest rates to account for a greater risk, all of which can once again be customized at the click of a button. Last week’s post on Individual Based Credit Assessment further examines the importance of these administrators.
As you can imagine, practices that relax requirements to maximize returns face a greater challenge in minimizing default rates: both in preventing soft defaults, and controlling the number of soft defaults that turn into hard defaults. As we’ve discussed before, the key to stemming the default tide is a proactive approach — structuring a program that has fail-safes in place from step one, rather than trying to chase people down months after their last missed payment.
In future posts, we’ll profile doctors who have built impressive payment plan programs based on this more aggressive approach, and examine the tools they use to maximize their returns and control their risk.