Managing Risk: Individual Based Credit Assessment

As we discussed last week, optimizing returns on in-house financing starts with managing risk. And managing risk starts with evaluating patient profiles to minimize default rates. Our last post suggested a uniform system running credit and bank checks as well as other procedures for each candidate, with minimum requirements for each. However, this is just a starting point, and today we’ll explore why a more three-dimensional approach can be beneficial.

Imagine a patient walks into your office seeking a $3,000 dollar procedure, with a hard cost of $500, but can only put $1,000 down. You check their credit and bank check scores and they are just below the minimal threshold in your system, painting them as a potential risk.

Do you turn them away?

While conventional wisdom suggests barring anyone who doesn’t meet minimal requirements, the fact of the matter is credit scores have dropped nation-wide as a result of the current financial crisis. Scores below 690 are becoming common, making it increasingly difficult to obtain loans, even for those with a steady income and satisfactory financial track record. Simply cutting everyone off based on credit removes a large percentage of the population from your demographic.

Sticking to hard and fast credit requirements will certainly minimize your risk, but in the above example, do you allow the patient to take their $1,000 out the door? If your practice already has no trouble filling your appointment book, then by all means let them go. But if you’re not at capacity, it may be beneficial to work them in. Before the procedure even begins, the patient above has covered all hard costs, and put $500 in your pocket. Even if they immediately default — the absolute worst-case scenario — you’re still up $500. Of course, if you look at the money you could have made if paid in full, this is a net loss, but you’ve still gained more than if you’d stayed idle.

Doctors offering in-house financing have a variety of philosophies in terms of the amount of risk they’ll accept, but all of them have implemented systems to work with patients that fall outside of their usual requirements. As we discussed last week, an administrator with the power to override origination requirements goes a long way in terms of facilitating this process, and automated software makes it easy to adjust down payments and interest rates to account for riskier profiles.

In future posts, we’ll explore ways in which practices can cover themselves in riskier lending situations, with perspectives from doctors on both sides of the high/low risk and reward spectrum.


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