Financing as a Selling Tool
You don’t have to be a CPA or loan officer to talk to your customers about financing equipment.
Fall asleep during that microeconomics class in college? Balance sheets not your thing? Have trouble distinguishing an asset from a liability? Don’t panic.
If you’ve ever bought a car or house, or even used a credit card, you probably have all the smarts you need to talk to your customers about financing new equipment or construction, according to experts who spoke with First Impressions. In fact, the single most important prerequisite for holding such discussions is your ability to get inside your customers’ heads.
"[Dentists] are thinking of revenue per patient, per week or maybe per month," says Joe Mitchell, senior vice president of dental and eye care, GE Healthcare Financial Services, Vendor & Practice Solutions. "A distributor rep who can give the customer a monthly payment option to compare to revenue-generation potential will generally
be successful.
"If a new piece of equipment can generate $500 a month in new revenue and payments are $200 a month, the [dentist] thinks, ‘I can make $300 a month profit on that,’" says Mitchell. "That’s much better than [the dentist thinking], ‘I can get $500 a month in new revenue, but I have to fork out $100,000 for this equipment.’"
"It’s selling conceptually," adds Paul Jackson, vice president of marketing for Benco Dental, Wilkes-Barre, Pa. Benco maintains a close working relationship with Clarion Financial, (also located in Wilkes-Barre), which provides financing to dental professionals.
"Our reps have to sell total acquisition cost," says Jackson. [Dentists] might throw up their hands when they consider the price of new operatory equipment. "But when you price it out per month, he might see that he’s losing that much a week by not having it." It’s all about selling the value of the equipment as opposed to its price.
"It’s much easier for dentists to budget for equipment if there is a set monthly cost they can forecast," adds Chris Hovde, program manager, Clarion Financial.
Who’s financing
Financing trends mirror trends in the dental profession itself, according to experts. As dentists upgrade their equipment, automate their operations, improve the appearance of their offices or even prepare their practice for sale, their need for financing grows.
"There’s more of a need for dentists to make continuing investment in their practices, and financing helps facilitate that," says Mitchell. New technology - such as the CEREC system, digital radiography and computer-based patient records - is driving much of it, he says. But changing practice patterns are also playing a role. "You’re seeing practices getting larger, so the amount of money [dentists] are investing is higher."
Perhaps not surprisingly, young dentists may be leading the pack. "Dental students today are entrepreneurs," says Allen Schiff, CPA, managing member of Schiff & Associates, a dental CPA and management consulting firm in Towson, Md. Schiff has taught at dental schools for 20 years. "They are willing to take risks. And the sweet spot seems to be three years out of dental school. That’s when they’re willing to take on another $400,000 to $500,000 of additional debt to either start or acquire a practice, even if they already have $125,000 of student loans."
Having been exposed to new technologies in school - such as wireless microscopes, intraoral cameras and three-dimensional imaging systems, young dentists expect to use them in their practices as well, says Schiff.
In some cases, the desire for new technology by their younger counterparts is driving older dentists to seek financing as well. "Some older dentists feel obligated to update their office so they can attract young associates," says Hovde. These dentists know that younger professionals will be more attracted to an up-to-date practice not only to work in, but perhaps ultimately, to acquire.
For office setups and renovation, companies such as GE Healthcare Financial Services find themselves providing financing not just for equipment, but for working capital as well. "And we’re also seeing a shift in the percentage of financing dollars that go toward what we call ‘soft costs,’" says Mitchell. Historically, the majority of money needed to start a practice went to operatory equipment and other hard goods. "But today, 60 percent or more can go to software, renovations and wiring for networks." And in an effort to attract and maintain patients, doctors are spending more on amenities and the aesthetics of their waiting rooms.
The fact that dentists are safe risks means money is fairly easy to obtain. "In the past, lenders didn’t believe in the dental industry," says Schiff. "But now, they see the success that dentists are enjoying. The national [lending] failure rate for dentists is 0.003 percent, so lenders see that the chances of default are very, very slim."
"Financial companies like ours are willing to be aggressive, because the dental market has been consistent in generating revenue and profitability," adds Mitchell.
Lease or loan?
Although distributor reps don’t need to know the inner workings of financing arrangements, they should understand how tax laws are affecting their customers’ financing decisions.
Perhaps the most important law on the books today is IRS Code Section 179, which allows dentists to significantly accelerate the deduction they may take on newly acquired equipment in the first year of ownership. Traditionally, most dental equipment qualifies for a five-year write-off (and furniture and fixtures a seven-year write-off), according to Schiff. But under IRS Code Section 179, dentists can deduct as much as $112,000 from qualified purchases in 2007. (To qualify, the equipment must be installed and in use by Dec. 31, 2007.) "Section 179 is so favorable that many of my colleagues at the Academy of Dental CPAs refer to this tax loophole as the ‘Dentist Reinvestment Tax Act,’" says Schiff (who was a founding member of the Academy of Dental CPAs).
Section 179 was set to terminate in 2005, but was extended in 2006 and 2007. At this point, it seems likely that it will be extended into 2008, though that’s not a sure thing. Even so, says Schiff, "Like all good things, this will probably come to an end, so dentists should find out if they can take advantage of it while they can. Dentists should start the planning process early with their professional advisors.
By making it so attractive to purchase equipment, Section 179 has put a serious dent in the leasing market. That’s because in leasing arrangements, the dentist (or "lessee") does not own the equipment; rather, the lessor, or lender, does. That means that the lessor - not the lessee - enjoys most of the tax benefits.
"In a lease, the leasing company owns the equipment, and the doctor leases it back," says Hovde. "But with a finance agreement, it’s no different than when you’re buying a [car]. You have ownership of the vehicle; you are responsible for insuring it; you make payments to your bank. But that entire time, that [car] is in the buyer’s name; whereas with a lease, it’s in the lease company’s name."
That’s not to say that leasing is not an option for some dentists in certain circumstances, says Schiff. For example, a lease usually calls for only a small down payment by the dentist, and it may be an attractive financing mechanism for equipment that in all probability will be obsolete at the end of the lease period. And for dentists with poor credit, leasing may be their only financing option.
Sales reps should urge their customers pursuing loans to make sure they understand the fine print of any contract they sign, says Schiff. "It should be reviewed by the dental CPA and an attorney. There could be some very small font in the contract that may not be advantageous to the person borrowing the money." For example, dentists should be on the lookout for so-called "spousal guarantees," which call for the spouse of the borrower to guarantee the loan, he advises. "If I’m a [male] dentist and my wife is the director of first impressions, or my receptionist, why should she be guaranteeing the loan if she’s not a dentist?"
Selling tool
No one expects a distributor sales rep to be a CPA or loan officer. Sometimes a simple calculator - to figure out rough monthly payments - is all that’s needed to get a dentist interested in acquiring a new piece of equipment. But reps should understand the power of the tool they have at their disposal.
"Financing plays an integral role in the success of a salesperson selling equipment to dental professionals," says Hovde. "It allows them to control the sales process and to focus on selling a monthly payment as opposed to the full equipment cost .... It’s even easier if the rep can demonstrate how that new piece of equipment may add incremental revenue to the practice."
"If you don’t offer financing to your customer, your competitor will," adds Mitchell, quoting an expression he heard once - and admires to this day. [FI]
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