Debt collection for your small business: what you need to know



 

Every business owner knows the importance of carefully managing cashflow. 

Cashflow is the ‘lifeblood’ of business. It starts with getting paid and ends when you do not.

Being paid immediately upon delivery of goods (or services) is always preferred as ‘Cash is King’. For example, when purchasing items from a retail shop or online, you will be required to pay in full before leaving, or having the items delivered if purchasing online.

But this is not always the commercial reality and payment may be made within an agreed time, or in the absence of agreement a reasonable time, after the goods (or services) have been delivered.

What most business owners may not understand is that when payment is not required upon delivery, then they are extending a ‘line of credit’ to their customer.

From time to time where a business extends credit to its’ customers, it will likely encounter a customer that does not pay its invoice(s) on time or at all.

If not carefully managed, late payments can devastate your own business as you are relying on the income from your customers paying on time, so you can pay your own suppliers, service providers, employees, and other expenses such as taxes and rent.

Chasing customers for payment can be a distraction – sapping precious time, energy, and resources, that should be spent acquiring new customers, developing additional products, exploring new markets. 

In general chasing debts (including bad debts) saps precious resources that could be used to grow the business.
 

What are practical steps you can take to prevent trade debts from turning bad?

When it comes to preventing bad debts, prevention is definitely better than the cure. And there are things that can be done to minimise the risk of trading debts turning bad.
 

You do not have to take on every customer

When commencing a new business, you will need customers to start buying your good (or service) and in the rush and excitement of people becoming curious about your business you may tend to take on customers that, in hindsight, know we should not have taken on. 

Be careful about who you do business with. This comes back to the understanding of who your ideal client is and sell to them.

If you are giving customers credit, make sure they are a good credit risk. 

You can do online checks or ask for trade references. 

Make sure the customer is not in administration or liquidation. 
 

Have an up-front discussion about price and payment terms with your customer

Be clear with customers from the beginning about your trading terms before agreeing to supply. 

Invest in suitable Terms and Conditions, that are relevant to the products or services you will be supplying. They do not need to be overly complicated. 

The important thing is that they clearly set out how you do business, and that you communicate them properly to customers.

Your T&Cs will help the customer understand the products or services you provide, how and when they will be delivered, the price and when payment must be made.

Set a sensible limit on how much credit to grant to the customer. Start small and only increase the limit as the customer proves their creditworthiness.

Manage customer expectations. This dramatically reduces the risk of a payment dispute. And if there still ends up being a dispute later, you will have the evidence to support your claim.
 

Invoice

Invoice your customer This may be so obvious that it need not be mentioned. 

And therein lays the problem. Invoicing is generally not given proper thought.

It is surprising at how many invoices that are prepared poorly, incorrectly, or even misunderstood entirely.

An invoice is a statement from the supplier to a customer that notifies the customers obligation to make a payment.

The invoice should set out what was done and the charge (or price) for same.

The invoice has to accurately reflect the obligation to pay under the terms of trade.

A tax invoice is not only the notice to the customer of its’ obligation to make a payment of goods (or services) supplied under the terms of trade but calculates and sets out the taxation treatment of that supply and notifies the customer that payment of the applicable taxes is also required.

Make sure you invoice customers quickly after you finish the job, or at regular intervals. This shows customers that your business is organised and values prompt payment.

It also increases your chances of being paid as the customer remembers the good work that you did.
 

Make it easy to get paid

Try also to give your customers easy options to make payment. 

For example, accept credit card payments online or set up a direct debit facility. 

Discounts could be considered for customers who pay early and are given as generally as a gesture of goodwill for repeat business by a particular customer. 

However Be Careful. It could lead to training your customers to expect discounts on their bills which in turn could de-value your good or service in the customers eyes.

Discounts also affect your bottom-line. So use them wisely and keep them small. 
 

Have a back-up plan

You can help reduce the risk of a bad debt, by giving yourself alternative options. If extending credit, consider if you should take some form of security.

Depending on your business, options might include:

  • If the customer is a company, obtaining a personal director guarantee.
  • Asking for pre-payment or holding some cash on account.
  • Do you need to take security over the assets of the customers business under the Personal Property Securities Act 2009 (Cth).

 

How do you recover a debt?

No matter how organised you are it is sometimes impossible to avoid situations where a customer refuses to pay on time or at all. And disputes will arise about quality of the service, workmanship or the goods supplied.

That is why your business also needs a debt recovery process. 

Firstly, make sure you monitor your customer account balances and keep an eye on the size of any outstanding payments. Watch out for warning signs, like the balance going over any pre-agreed credit limits.

Your debt recovery process will then normally include the following steps:

  • Friendly reminder.  A quick phone call, visit or email can often clear things up. Maybe they have overlooked the bill or misinterpreted the terms of payment, i.e. 30 days from invoice can, in some industries, be short-hand for 30 days from the end of the month the invoice was rendered. Keep the tone friendly - you still want a good relationship with your customer. 
  • Overdue reminder. Next step is a more formal attempt to remind the customer. You could try address this to the business owner or CEO, rather than your usual day-to-day contact.
  • Final notice. A final warning shows your customer that you are still doing everything you can to give them chance to sort out the situation. This might be when you start to consider getting legal advice to help you recover the debt. As a rough guide this should be at about 60 days overdue.
  • Formal letter of demand. This gives the customer a fixed amount of time to pay the debt, otherwise you will start legal action. As a rough guide this should be at about 90 days overdue or older.
  • Pursuing the debt in court. If nothing else has worked, you can take the customer to court.

At every step, listen for the reasons given – it might help you find a solution. If the customer is struggling, maybe a payment plan would help you get paid? If they were unhappy with your service, maybe a meeting would help clear things up?

Also keep a written record throughout the process. If anything is agreed on the phone or in a meeting, confirm it in an email afterwards. This situation might drag on, and it can be valuable to have the evidence of what has happened.
 

Maximise your chances of success

An outstanding debt can be a huge distraction for your business – and cause you a lot of stress.

At Holcroft Lawyers, our experienced team is available to assist you setting up your business to minimise the risk of bad debts. If you need it, we can also help guide you through the process to recover a debt quickly and efficiently - maximising your chances of success and getting you back to business.

 
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