Debt recovery do’s and don’ts
“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them”. – Ogden Nash, American poet and humorist
Arguably even less fun is the plight of the creditor, forced to chase bad debts in what can be a messy, protracted and often bitter affair for all involved.
For best practice two things are paramount:
1. A professional approach to debt recovery.
2. A willingness to review and improve internal procedures and documents.
It is remarkable how a combination of professionalism, procedures and documents silence those who might otherwise whine or wriggle their way out of paying up. In our experience very few businesses have in place arrangements for which no improvement is needed.
Aiming for best practice, here’s a short list of DOs and DON’Ts for creditors pursuing debts. They are simple to implement.
Ignore them and debt recovery will cost more, take longer, produce less useful results or result in further losses with “good money chasing bad”.
Debt recovery do’s
1. Do be willing to negotiate
Potential disputes can often be avoided by being flexible and realistic. This may involve: a delayed payment timetable, an instalment arrangement, a reduced amount or even quid-pro-quo arrangements.
Ensure to follow up payment deadlines.
2. Do make records and rely on clarity
All communication you have with a debtor is potentially going to appear as evidence in court. Ensure demands and requests for payment are accurate, comprehensive and comply with best practice (see the Don’ts list).
Keep records and make records of all verbal communications.
3. Do learn from mistakes
As problems arise, question if there are lessons to be learnt to avoid similar problems in the future. Legal improvements, which reduce risk, include: legal trading terms and conditions, retention of title clauses, company charges and other legal security measures.
Practical improvements include: insisting on an up front payment, written assurance regarding payment times, use of a credit check, standardised sales spiel, proposal templates, and documented biding and billing procedures and documentation.
If your business supplies products on credit, also consider requiring customers to fill in and sign a Credit Application containing your standard trading terms and conditions and requirement for personal guarantees.
4. Do ask for professional help
In some situations, a lawyer’s letter of demand can prompt due payment. It raises the bar above “just another pesky follow-up”. Lawyers can also advise on the strength of your claim, the options for recovery at law, the likelihood of success and the estimated costs moving forward.
5. Do establish and execute firm Debt Collection Policies and re-evaluate to improve their effectiveness
The establishment and execution of debt collection policies can minimise problems associated with accounts receivable and most importantly provide you with far greater cash flow.
As with all policies, they must be re-evaluated from time to time in order to determine their effectiveness.
Debt recovery dont’s
1. Don’t go overboard
The Debt Collection Guideline [PDF] published by ACCC and ASIC provides collectors and creditors with practical guidance to avoid breaching the law when recovering debts.
Debt recovery activity is affected by the Trade Practices Act 1974 (Cth) and other law. Areas covered in the law and the Guideline includes appropriate times to contact a debtor, privacy obligations owed to the debtor and provision of information and documents that may be requested.
2. Don’t get personal
Unjustified threats or intimidation tactics are contrary to law and can work against you if legal proceedings are commenced. Maintain a professional approach in debt recovery no matter how badly done by you feel.
3. Don’t be reluctant
Many businesses are reluctant to enforce strict collection procedures. The reasons for this are several, and none of them are valid. Some people simply are embarrassed to ask for money even though it is owed to them.
Others express concern that they might alienate a “good customer” and perhaps lose an account. The opposite is true. How good is an account if the bills are not paid? Even more important, the customer owing you a large balance may be reluctant to do more business with you until the account is cleared. You have not only lost your money, you have also lost a customer. Some companies feel that rigorous enforcement of a collection policy can damage their reputation. Viewed logically, would you conclude that a person who owes you money is likely to spread this news around town?
4. Don’t get emotional
Be realistic about debts. If you need to engage a lawyer, legal fees and court costs can quickly make recovery uncommercial. Before deciding what to do, factor in the time, effort and stress arising from legal proceedings. You’ll be less emotional if you prepare by learning from mistakes and promptly implementing improvements.
5. Don’t forget the evidence
The debtor is entitled to ask for documentation supporting a claim. It is even more critical in litigation. Debt recovery action is strengthened if there is a properly maintained file of contracts, invoices, receipts, emails, file notes of conversations and records of work performed.
Few businesses can avoid bad debts. All businesses need to implement measures that minimise the risk of bad debts and increase the chance of debt recovery action being efficient and effective.
Bad debts can drive a business into insolvency, expose proprietors to personal liability and lead to far worse. Late payments can do the same.
Prevention is better than cure. Prevent the cost, time and hassle of chasing debtors by perfecting sound in-house debt collection procedures to eliminate problems before they occur and minimise those that do occur.
If you apply these techniques to your own business, your profit will improve and your cash position will be strengthened.
Profit will improve through fewer debtor losses and lower costs of credit administration. Capital will be freed so that you will be able to meet your own obligations promptly and invest in those assets that offer a significant profit potential.