One of the most frustrating aspects of running a business is not being paid on time for the goods and services you provide. Customers who don’t pay on time eventually cost your business time and money in chasing them to settle their bill, not to mention the impact on your cashflow.
While businesses in this situation certainly have legal rights that allow them to take action to collect from debtors, there are also many pre-emptive things a business can do to both reduce the prospect of indebted customers, and improve your internal processes for recovering debt. We’ve listed 10 essential points any business should consider when approaching the area of debt recovery.
Know who your customers are
Many of the problems with customers who struggle to pay stems from a lack of initial due diligence on the part of the business that extends them credit. By first checking publicly available company information and otherwise gathering as much information as possible about the business you’re lending to, you can effectively ‘screen’ those who are likely to be able to repay from those who are not… and hopefully reduce repayment problems.
Offer customers incentives for early or instant payment
A decision to offer a debtor a discount or some other incentive to pay you back early or on time obviously needs to be weighed against the costs of chasing them for payment. Many businesses will prefer to be paid back at a slight discount, maintaining cashflow, rather than spend time and effort chasing debts. If discounting payment is not an idea you wish to entertain, other incentives such as offering certain customers exclusive products or access can also encourage on-time payment
Have clear, transparent and accessible contracts and terms
While it seems obvious, many businesses use contracts that are either too vague on key details, or alternatively too heavy with legalese for those to whom they extend credit to understand. The guidance of a legal representative with experience in debt recovery is often essential in helping a business draft a succinct, clear and transparent document which sets out payment terms, methods of payment, time limits, manageable credit limits and penalties for non-payment by those they extend credit to. This can avoid any ‘they said-he said’ disputes later, and prove crucial if legal action for debt recovery is later required.
Provide different options for repayment
By diversifying the methods by which customers can pay, you can encourage them to honour their obligations rather than ignore or delay them. A payment plan or instalments might be better than not getting payment at all, but obviously this decision will depend on the size of your business and your cashflow position.
Make someone in the business a ‘debt recovery officer’
Many businesses make the mistake of having more than one person responsible for chasing up late or non-paying customers. This can lead to confusion and duplication, particularly in larger businesses with many clients. Ideally there is one person, or a dedicated team leader, responsible for debt collection, streamlining the interaction of the business with debtors. In smaller businesses, if this seems too big a job for one person, external experts can be employed. Many law firms now offer specialist debt recovery services.
Ensure there is a systematic invoicing process where you follow-up on late payments
Following on from point 5, a debt recovery officer should be managing a systemised process of invoicing and follow up of late payments. Whichever way this is done, the process should be accessible to all those involved in transactions between the business and clients. The process should also be clear and transparent for the customer, so they are aware of what the follow-up contact is in relation to.
Communicate verbally with the debtor
This point follows on from 5 and 6 but again, also applies to anyone in the business who deals with customers. In these days of email and online portals, it’s easier than ever for customers who owe money to ignore or put off requests for payment until it suits them to pay. Sometimes a good, old-fashioned chat on the phone between, say, the debt recovery officer and the client, can lead to quicker payment. There’s still no substitute for dealing with a real human.
Insist on a written payback commitment
While there may be a contract in place, and there have been polite requests for payment and even a friendly chat on the phone, you should also consider a written ‘payback’ commitment presented to the debtor when the debt becomes payable. Here the debtor acknowledges the debt, explains why it hasn’t been paid on time and promises to pay it back by a specific date in a return email or letter. This document, like a contract, will also assist if later legal action is required for non-payment.
Keep a record of all contact details and communication with the debtor
A comprehensive and accurate record of all the ways the business has contacted the debtor should be kept. These days, various software tools make this easy to do. A record of the contact made with the debtor will be vital if legal action needs to be commenced against the debtor.
Stop the account and take legal action
Obviously there comes a point where a business has tried everything to get a customer to pay, without success. At this stage the logical course of action for the business is to cut off service and/or credit to the client and consult a lawyer about the next steps to recover the debt/s.
OMB Solicitors has many years of experience in advising and guiding businesses on debt recovery actions. If any of the issues raised in this article provide you with questions or concerns, contact OMB Solicitors today on (07) 5555 0000 or [email protected]