5 things you should know about...Managing your Debtors
1. Know your customer
Make sure the customer is one you want to work with – what is the point having a customer who does not pay?
Find out about your customer and potential debtor before you incur expenses on their behalf. Your enquiries will vary depending on the circumstances, including the size of the debt likely to be incurred, customer history and your type of business.
Company investigations may be conducted online, through the Australian Securities and Investments Commission (ASIC), www.asic.gov.au.
Credit agencies such as Dun and Bradstreet also provide more detailed credit reports when the debt is likely to be large.
For individuals, a bankruptcy and court searches may also be relevant.
Obtain and check business referees. Your lawyer or accountant can assist and the cost shouldn’t be too great.
2. Put it in writing
Use standard terms and conditions – trading terms. Together with the order or invoice they will form the contract with your customer. Carefully drafted trading terms will greatly assist you in getting paid. Provide your trading terms to all customers or clients and include trading terms or refer to them on your invoices. This will put your customer on notice how long they have before must pay.
If you do not have trading terms work with your lawyer to prepare them.
The details of the sale should be in writing, typically through an order or invoice. They should include a description of the goods or services provided, the date ordered and the date delivered, amount, GST and when it is due. If the invoice includes GST, the invoice should state it is a “tax invoice”.
3. Consider personal guarantees from directors
Where your customer is a private company and is running a large account with you, you should consider obtaining personal guarantees from the directors. This will allow you to seek payment from the directors personally, if the company cannot pay its debts. This gives you better protection and the directors have an incentive to pay the debt.
4. If the debtor does not pay – take action
Many businesses act too late. While balancing customer relations and debt management is difficult, you must be pro-active.
We suggest a five stage approach:
Reminder/statement – send these out with each new account and on a regular basis;
Phone calls. Call your customer early and regularly;
Follow with informal and then formal letters or emails. None of these first three actions will cause any damage to customer relations;
Legal demand. If you don’t receive an appropriate outcome within specified period of time, get your lawyer to write a letter of demand. Once you send the letter of demand you must be prepared to act on it;
Commence legal action. Often this final step will result in payment – if not take the matter to court.
5. Adopt a system
Put a system in place in relation to the matters set out above and follow it. Have standard emails and letters ready to go. Automate reminders and actions. Make it easy and effective by preparation.
For more information please call Leanne Scott at Carter Lawyers on (03) 8646 3855 for further assistance with managing your debtors. The first call is free.
The information contained in 5 Things you should know about...Managing your Debtors is for your general information only and should not be relied upon as specific legal advice. You should consult your lawyer, accountant or other adviser to obtain advice to suit your needs.
© David Carter and Leanne Scott 2010