Compassionate Finance

[MolarDoc]

Hello all,  This will be my first post here at the MMM forum, so go easy on me.  I have followed the lending club experiment over the years, and now I find myself in a position to make similar loans.  I need advice from those with experience making such loans, as I will explain.

As a dentist my practice is always looking for ways to help our patients get the care they need.  I was presented with a new option, Compassionate finance.  They facilitate me making loans to pts for dental work that I will provide in my office.  I set the rate and length of the loan, they handle the credit check and servicing.

I don't have a ton of details as I have not been allowed under the hood completely just yet as I am still finishing the onboarding paperwork, but I am trying to figure out how best to use the tool, and want to make sure it is a safe option for me. 

Basically, my patients will make a down payment high enough to cover my hard costs.  They will then make an auto payment arrangement with comp finance for the rest.  If all goes as planned, they make monthly payments to me for the term of the loan, and in the end I get paid back plus interest.

All fine so far, but the fees have me concerned that the interest received net fees isn't enough to compensate for the risk of default.  The company takes 4$/month per loan, plus 0.5% of the remaining balance out of each payment.  They also have a $149 per month flat fee per practice.  The fees seemed to average 7-9% and the max interest rate allowed in my state for such loans is 17.99%.

If we call my interest rate on the debt 8%, are these loans I should be making? 

It gets more complicated of course, because the idea is that by having more flexible payment options, the practice is able to tap in to the vast amount of treatment planned procedures that are needed by patients, but that they aren't undertaking because they perceive them to be too costly.  This also allows us to be significantly more productive per hour, and hence, with hard costs covered and variable costs relatively equal, I would be creating paper profits that would pay out each month.  Even if there are some defaults, it is work and $$ that would otherwise never have been realized anyway, so it is OK to take on the risk.  (The company line, but logical)

Even if folks don't have answers, any help guiding me on what questions I should be asking or what information would be useful would be greatly appreciated.  I don't want to get in over my head on this, but it seems like a solid opportunity to help my patients and increase my practice revenues at the same time.

[Scandium]

Now I know nothing of the market, but seems to me that someone who can't afford a (usually?) few hundred for dental work would be highly, highly! likely to default on such a loan! And someone who would take an 18% loan do to so?! Plus the fees, this sounds like very high risk to me. To get more customers who can't pay? Sorry don't have any advice, other than be very careful I guess..

[Goldielocks]

Is your primary interest to increase your dental practice business, with a small cash flow business from loans as secondary?

If so, I am wondering why you would not offer a different structure, go solo instead:

A) Large down payment for the hard costs..  e.g. 25%
b) Significant financing fee to arrange and pay for credit checks... only give to good candidates.. $150 (a portion is non-refundable if denied)
c) Then a 12 month equal payment plan at 0% interest.   (short duration is to get more money in the first few months.

So, a $1000 dental procedure would get $250 upfront, plus $150 fees (minus $50 credit checking and contract prep service), and $62.50/month for the next 12 months.

If they fail to pay after 2 months, (a hopefully worst case) then you have a bad debt offsetting income for $475, but you have covered your hard costs plus $225 (net of credit checks).

In the meantime, your dental business has increased 20%, at a 30% profit on the incremental business, which would more than offset your bad debts if they occur.   Obviously you need to do your research and math, but I don't see the large advantage that another firm doing this for you would have, if you are carrying the risk of the bad debts.

[cburton103]

Fellow dentist here. I don't do Compassionate Finance, but I have no problem with it. We do a bit of Care Credit in my practice and a bit more payment plans. The payment plans we do through the office we don't charge interest for, and they're typically for bigger or longer lasting cases and the patient pays as we go. Things like exts/dentures, short term ortho, implants, or bigger restorative cases that take a number of months to complete. I haven't had more than a few percent of payment plans default. Even if a card is declined or something along the way, usually your front desk can just call the patient and get it figured out.

The way I see it, the big win with financing treatment is growing your production, not the interest gained. You'll simply be able to do more dentistry and likely some bigger cases than you would be able to otherwise. And as you know, typically as production/collections rise, overhead falls. So double win. And then you can save faster for your financial goals with even basic mustachian principles. Keep the house and car in check and you can really make some quick progress. Best of luck!

[Morning Glory]

So patient pays 16% interest, you only get 8%, and you take on all of the default risk? Sounds horrible. The company is getting 7-9% in fees for doing what exactly? Not "compassionate " at all. If you are taking on all the risk anyway why not DIY and charge a more reasonable rate. Alternatively, you could just refer them to a loan company, get your money up front, and take on no risk at all.