Debt collection can be a frustrating exercise for the most experienced business owners. When work and/or materials have been provided there is an expectation that your invoice will be paid in a timely manner. Although this may be the case on paper, sometimes companies do not pay on time, leaving substantial debts unpaid.
There are preventative measures that you can implement in your business to minimise the risk of debts accruing and maximise your rights to pursue the debtor upon non-payment. These include:-
- Properly identifying your customer
It is critical to make sure your credit applications have been accurately completed by customers. For a small search fee, we are able to conduct a company search on your behalf which will show details of who the directors and shareholders of a company are and whether any statutory charges are registered over the company or the company’s assets. Alternatively, there are other free searches available through the Australian Securities & Investments Commission (ASIC) website.
You need to properly identify if you are dealing with an individual sole trader, partnership, company or trust. If your business is dealing with a company, then a normal credit application we would prepare would include a provision for director’s guarantees. If the directors of a company are not prepared to give directors guarantees, alarm bells should sound and you should ask the question of yourself whether or not you wish to give them credit.
- Confirming your contracts in writing
Although many orders and contracts for work are discussed over the phone, it is extremely important that the terms of any agreement are put in and agreed to in writing before any goods or services are provided. While verbal contracts are still legally enforceable, it can easily become a war of words down the track.
- Keeping on top of your accounts
Credit control and debt collection is something no business or member of a business (whether it be the business owner or accounts manager) want to do, and as a result, it tends to be the job that is put at the bottom of the pile. This then becomes another pitfall in that by the time the debt is unpaid for 120 days, there is likely to be a real problem in recovery. Whereas if action is taken when the debt is unpaid for 30 days, there seems to be less issues in its collection.
- Keeping a record of your invoices, due dates and any other correspondence
Retaining copies of all relevant documents and communications, such as signed contracts, job confirmation emails and customer authorities as well as order forms, signed and completed delivery receipts is crucial. Any emails or correspondence where the debtor admits or acknowledges the outstanding debt will be very valuable in the event that Court proceedings need to be commenced to recover the debt.
In the unfortunate event that you are unable to obtain payment from a customer there are multiple courses of action that you can take, depending on the context. In any event, we always recommend you make or attempt to make contact with the debtor before taking more serious action.
Some of the debt collection solutions we can provide include but are not specifically limited to:-
- Letters of Demand – can be useful if the demand amount is relatively small.
- Repayment Programs – a lump sum amount to repay can be overwhelming to some people or businesses. In the alternative, being able to repay a debt in weekly instalments can often be more manageable. If your debtor happens to miss a week or consecutive weeks, more serious action should be taken more promptly.
- Instituting Court proceedings against the debtor – depending on the debt amount, proceedings can be instituted against individuals, partnerships or companies.
- Issuing a Statutory Demand – Statutory Demands can only be issued against a Company where there is no dispute as to the amount of the debt (i.e. where there are invoices to confirm the amount outstanding). If the Demand is not satisfied with within the statutory 21-day notice period, an application to liquidate the Company may be made to the Court.
Every business should have a debt recovery process in place. It should start with a follow up system and reminder letters being sent for unpaid invoices. Demand letters then should be sent if your previous letters are ignored. Having a clear debt recovery system in place makes it much easier to identify, address and resolve disputes quickly.
As a supplier of goods or services, having a clear line of communication with your customers, especially in situations of non-payment, will be vital to differentiate between those customers who are genuinely disorganised with paying invoices and those customers who are dishonest in their dealings. The disorganised customers will ordinarily pay once they are reminded, but the dishonest customers will often avoid paying until more serious action is taken against them.
We recommend you engage a solicitor when your invoices, reminder letters and demand letters have not been acknowledged by the debtor. This demonstrates to the debtor that you are serious about recovering your money and may assist in getting them to communicate with you, make arrangements to pay and resolve the dispute. In situations where the recovering of debt needs to be taken through the Courts or tribunals, engaging a solicitor to handle this will usually be more effective and efficient for your business.
If we can be of any assistance to our clients in relation to preparation of credit application forms, credit management systems, and the different options for debt collection, please do not hesitate to contact us.
