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Issue: 35 - Nov 15, 2011
Client Payment Options: Assessing the Viability of Extending In-House Credit
By: Jessica Goodman Lee, CVPM
Extend Credit

It’s time to re-think the way we conduct business in our veterinary practices.  Times have changed and will continue to do so, and it is the practice owners and managers that acknowledge this, and seek new ways to meet the needs of pet owners, whose businesses will thrive, regardless of the economy. 


According to the 2011 Bayer Veterinary Care Usage Study, the availability of payment options is one of four key drivers for increasing veterinary visits. Both pet insurance and third-party financing are the most obvious choices; but unfortunately most pets don’t have insurance, nor do all clients qualify for third-party financing many of us offer in our practices. Times are tough, and no matter how much they love their pets, many clients no longer have the means to cover the full cost of optimum preventative care let alone an unexpected illness or injury.


This presents veterinary practices with three options: the first is to subsidize these services through discounts.  But it is a business, not a non-profit organization, and this type of generosity will eventually lead to bankruptcy.  The second option is to only provide care to clients that are able to pay in full at the time of service.  While this is ideal in a perfect world, the limited number of clients that can do so may not generate enough revenue to keep a practice afloat.  The third option is to look for new ways to provide the ability to pay for care over a period of time. 


It is devastating for everyone involved when pets become ill or injured and their owners are unable to pay for treatment. This is the stuff of heartbreak and disillusionment, not to mention compassion, fatigue and burnout within the walls of our hospitals.   In these types of situations, extending credit in a controlled environment with the assistance of a third-party solution may represent the most viable option. There are many practices experiencing the benefit from this type of program. But all practices are unique, and the first step is to ensure that in-house financing will effectively increase patient care and generate more revenue for the practice.


Extending Credit = Lending Money

The first thing to understand is that extending credit is the same thing as loaning money. This means that extending credit is subject to the same state and federal consumer laws and regulations to which lenders must adhere.  There are critical legal requirements to manage in every step of the process –from the application and agreement forms, to borrower communication requirements, running credit reports, document retention and storage, missed payment policies and default resolution. 


Trying to ensure that your practice is up-to-date with ever-changing laws and regulations is not something that a practice can, or should attempt to, handle on its own.  It is overwhelming and there is far too much room for error.  If you factor in the frequency of staff turnover, it is easy to understand why trying to handle in-house financing on your own is not in your best interest. The simplest and safest solution is for a practice is to align itself with a professional loan servicing company that can provide a guarantee that their forms and protocols are in compliance with all laws and regulations.


Developing a Plan that Includes a Risk Assessment Strategy

When it comes to deciding who is eligible for extended payment terms and who is not, the decision should be based on a defined business strategy and then on criteria that is consistently applied to all applicants.  A properly designed program sets benchmarks for the number of credit applications approved as well as the dollar amount of credit a practice is willing to extend.  A good loan servicing solution will provide significant automation in this area, making it very simple for a practice to enter their rules and not have to worry about each loan.  Good solutions will also provide a “review” mechanism for special cases.


Do your homework!   Evaluate current client compliance, and compare the number of applications submitted to your third-party lender to the number of approvals you have received.  Talk to your team and get their perspective on whether there is not only a need, but a viable group of potential applicants based on the criteria you intend to use. Has euthanasia in non-geriatric pets increased as a result of a lack of payment options? 


Credit risk must be evaluated based on the purpose of the program.  For example, if the criteria for approval is too stringent, then the program will have little impact or value.  If the credit criterion is too lenient, the percentage of risk associated with missed payments and bad debt will be an issue.  It will be essential to measure and monitor these metrics on a monthly basis so that adjustments can be made if performance is deviating from pre-determined benchmarks.  It is a good practice to look at factors beyond just a credit score, such as banking information, employment history, references and others.


Remember that credit criterion must be applied consistently for all applicants.  While this may seem obvious, it is frequently disregarded.  The best way to avoid deviation and ensure compliance with external lending rules, is to have a written policy and monitor and enforce this policy regardless of individual circumstances.  If adjustments are to be made, they must be done so across the board.


The Importance of Automation

Getting Paid

When we talk about in-house financing, we are not referring to the “method” so many of us currently employ, which does not involve any credit risk assessment, a significant deposit, interest payments, or aggressive pursuit of non-payment.   We are also not talking about held checks or storing a client’s credit card information so that it can be processed on a monthly basis: although currently legal, both methods involve significant risk and are labor intensive.


Regardless of the case, the first thing is to make sure that any hard costs incurred (materials, medication, etc.), including associate compensation if paid on pro-sal, are completely covered through the client’s up-front down payment.  The only thing that should be financed is a portion of your profit, which ensures that you don’t “lose” money, while trying to grow your practice and provide needed care.


In-house financing involves the automatic debit of a client’s bank account using an ACH network (Automatic Clearing House).  This is the preferred payment method for professional lenders and other businesses that manage recurring monthly payments.  The transaction cost associated with ACH transactions are much lower than for a credit card transaction.  If a payment is unsuccessful, there is no charge to the business as there is with NSF fees when a check is returned.  Once an ACH transaction settles, there is very little risk of the transaction being reversed.


Requiring ACH payments are the key to minimizing the risk of offering credit, and this is the only form of re-payment that should be offered to clients.  Just as in the case of legal compliance, it means working with a professional loan servicing company to put this system into action.  There are many companies to choose from and it is important to check references and ask for recommendations from colleagues currently extending credit in their practices.  It is important to find a partner company that not only provides the basics, but who also has experience in the veterinary industry and offers tools and guidance for building a formalized platform to manage each step of the entire credit cycle.


Handling Missed Payments &Defaults

While automating the payment process using electronic debit to a borrower’s bank account greatly reduces the risk of default, missed payments still occur.  This is another point in the process where strategic payment management by a third-party professional can be extremely helpful since collecting money is definitely not a task at which most of us excel.


To prevent missed payments, consider implementing a protocol where each borrower receives a monthly payment reminder five days prior to the funds being withdrawn from his account.  If a payment is still missed, ask a company representative to call and resolve the situation and obtain immediate payment. 


If the borrower is unable to make immediate payment, the representative of the company would then call the practice to determine what, if any, special arrangements should be made to avoid sending the client to collections.  It is up to the practice to offer a restructured payment agreement, a change in the due date, or in extreme cases, to settle the debt at a discount.  Keep in mind that all this can be less painful, both financially and emotionally, than sending a client to collections. 


Consider all the Angles

When faced with a limited number of payment choices to offer pet owners, extending credit to clients through an automated in-house financing plan is an additional option worth considering.  When done correctly, it can be a win-win situation for all parties: the pet owner, the practice, and most importantly the pet.


For a program to succeed, the critical element is accountability within the practice.  When all team members, regardless of position, “walk the talk,” and commit to the protocols and requirements set forth without exception, extending credit can be a lucrative addition to the payment options a practice provides to its clients.


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Jessica G. Lee, CVPM

Practice Development Consultant

Brakke Consulting, Inc.