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Establishing Best Practices for Extending Credit in Today's Economy, Part 3

Nov. 29, 2011
in the final article in this series on credit, Dr. Bruce Baird discusses best practices for ensuring payment, as well as best practices for handling missed payments and defaults.

by Dr. Bruce B. Baird

In Part 1 of our article series on “Establishing Best Practices for Extending Credit in Today's Economy,” we described how dental practices can extend credit via internally funded payment plans, including the value of developing a written plan and formalizing the credit process. In Part 2, we covered strategies to consider in developing your customer credit program. This included deciding which procedures or types of transactions to include in the program and what types of customers will be eligible for credit. Now in our final article, Part 3, we will cover best practices for ensuring payment, as well as best practices for handling missed payments and defaults.Strategies for getting paidMost businesses accept several common forms of payment. Cash is always a welcome form of payment, though a poor choice for debt repayment because of potential theft and control issues with staff. Accepting checks is also a poor payment method for debt repayment because of identity verification and NSF risks. However, checks are a common form of payment for manually run payment plans. In these situations, the business obtains a series of checks from the customers representing the total number of payments to be made, and then, each month, deposits one of the checks as payments are due. While this might seem like a simple approach, the risk can be high. Future checks could bounce and incur NSF fees for the business, and then create collection issues. Also, the staff has to remember to deposit each check on time and keep the other checks secure from theft.Accepting credit or debit cards as payment is a more effective payment option, but carries a higher transaction cost for the business. Merchant fees associated with credit and debit cards can range from 1.5 percent to 6 percent of the transaction amount. Even under this approach, the business still needs to remember to process the payment each month as well as deal with failed payments due to expired credit cards or insufficient credit available. Most businesses know that manually reconciling credit card transactions is time-consuming and challenging, which is an added cost above the transaction fee.Automatic debit of a customer’s bank account is cost-effective and efficient. This process, which uses the ACH network, is the preferred payment method for professional lenders and other businesses that manage large volumes of recurring monthly payments. The transaction cost associated with a successful ACH transaction is much lower than a credit card transaction. Another plus is if a payment is unsuccessful, there is no charge to the business for NSF handling like there would be with a bad check. While ACH payments are more cost-effective for the business, there is a trade off of several days of delay in receiving payment into the business bank account due to the way ACH transactions are processed. The good news is that once an ACH transaction is completed, there is very little risk of the transaction being reversed, unlike a credit card transaction which provides a long time period for the credit card holder to challenge a transaction.What forms of payment should a business accept? Following the lead of professional lenders, it is recommended that payments be handled automatically via periodic ACH transactions that directly debit the borrower's bank account. In cases where the borrowerer doesn’t have a bank account, but does have a prepaid debit card, payments could be tied to the prepaid debit card at a cost to the merchant similar to those of credit card transactions. Using credit cards for loan payments is frowned upon by the credit card companies and should be avoided to ensure credit card agreements are not violated. Accepting checks or cash should be avoided except as manual paymentsm since they involve greater risk and more effort by the business.Effective automation is keyAutomating the payment process for recurring payments pays big benefits to a business. It reduces repayment risk, lowers transaction-handling costs, and frees your staff members to spend their time more effectively. Additionally, automated payment platforms provide a robust set of capabilities and reporting to assist with the overall payment process and help efficiently perform reconciliation and settlement tasks. Unfortunately, payment-processing services come with a range of services and capabilities, making it difficult to select the best service provider. A selection based solely on price often results in more work for the business, as it will need to stay in control of the entire process. A potential lack of integration with the overall lending process also can impede the effectiveness of stand alone payment-processing services, since this integration is critical for the overall management and control of the lending process. A robust, easy-to-use system that is integrated with the lending platform provides a rich set of capabilities to maximize results for even a small business with a limited staff.Strategies for handling missed payments and defaultsWhile automating the payment process using electronic debit to a borrower's bank account greatly reduces the risk of a default payment, missed payments still occur and can lead to loan defaults. So given that we followed best practices during the application process and are using automated payment processing, what steps are recommended for handling missed payments?Automated payments fail for a variety of reasons. Assuming payments are made via ACH, a payment may fail due to insufficient account funds or a closed account. Generally, sending a payment reminder to the borrower prior to each payment due date will ward off these issues before they occur; but when they still happen, it is best to immediately contact the borrower to discuss the missed payment and agree upon a corrective action, such as an immediate payment to get back on track.Taking manual payments to correct a missed payment forces the issue with the borrower. The borrower has to respond to your request by either coming into your office with a payment, authorizing an immediate debit of his or her bank account, or providing you with a credit card for payment. If the borrower declines to correct the situation immediately and seeks a delay in payment or if the borrower declines to honor the payment agreement, you know you have a more serious potential default situation. Even in these extreme situations, being able to restructure the terms of the original payment agreement with you might be the best way to avoid a true default. That said, if it is clear that a default situation is occurring, it is best to immediately hand off that account to outside collection agencies for processing. This provides two benefits for you.First, delinquent accounts that sit unpaid for more than 30 days become uncollectible very quickly. Studies show that unpaid accounts that are 60 days or more past due have less than a 50 percent probability of being collected at all.Secondly, it shows the borrower you “mean business” and often prompts him or her to agree to take action to correct the default situation. At this point, you should have established guidelines outlining what your business is willing to accept to resolve a default and who is authorized to offer this deal to the borrower.For example, your policy might dictate that an email payment reminder is sent five days prior to the due date for a payment. If the payment is missed, a representative then contacts the borrower by telephone to discuss the situation and resolve the problem. During this call, the representative will push for immediate payment via one of the accepted forms of payment. If the borrower cannot make immediate payment to correct the default, an inquiry is made regarding possible special arrangements to correct both the current and potential future payment problem situations. These special arrangements might include restructuring the payment agreement to change the payment amount; changing the monthly due date; or in extreme cases, moving to settle the debt at a discount with one or two payments. Approval of any special arrangement would typically require someone other than the representative to approve the arrangement. It also would require the borrower to consent to the new arrangement in writing. If none of the above actions corrects the default, the account should be sent to outside collections. However, the objective before taking this path should be to settle the debt at a lower overall cost compared to what could be expected using an outside collections service. Since each situation will be unique, multiple steps with associated escalation points should be employed to quickly filter payment problems to only those hard default cases. Using an outside third-party service for both the soft collections and hard collections processes can be a cost-effective and efficient option for many businesses. Using a third party also relieves your staff members of the uncomfortable burden of handling collections and frees their time to do what they do best: serve your customers. Fees vary depending on the scope of services and the delinquency of the accounts involved. There are many options available, so it is best to shop around for a provider that understands your business, has a good reputation, and is competitively priced. Services such as Comprehensive Finance even include soft collections in the bundle of capabilities provided to their customers.Effective automation is keyJust like all of the steps leading up to this point in the process, automation is key to ensuring the best results. Handling missed payments and defaults manually is time- consuming, stressful, and risky. Automated payment reminder emails reduce missed payments. Using effective automation to alert, list, and manage payment issues keeps needed visibility around the issue and organizes the workflow involved in resolving these situations. Integration with outside collection services for hard default situations provides up-to-the-minute status updates on where these accounts are in the collections process and simplifies communications with the outside service provider.A robust, easy-to-use system, coupled with a service provider to conduct soft collections activity on your behalf, provides a rich set of capabilities to maximize results even for a small business like a dental office..
Dr. Bruce B. Baird is the CEO and founder of Comprehensive Finance, a coaching program and online lending software platform for creating and managing in-house customer financing plans for small and mid-sized businesses. Visit the company’s website at