No matter the size of your business, if you’re offering credit to your customers it’s highly likely at some point you will do work for a customer who will blatantly refuse to pay.
The most effective tool for collecting money you are owed is simply picking up the phone and asking your debtors if there is a reason your account hasn’t been paid. If say your customer has a legitimate dispute or problem, you will be able to solve it immediately.
In most cases, this results in your bill being paid. If this doesn’t result in payment then you will know you are dealing with a potential bad debt problem, which you need to do something about.
Having well drawn trading terms is a simple means of reducing the risk of suffering bad debts from unreliable customers. Implementing these steps is the most important step you can take to protect yourself but sometimes it’s not enough.
If a customer isn’t paying – be they an individual or a business – always consider offering a short-term instalment program to help them pay back their debt. This should be sent out in an email with fixed dates for payments and clearly state that failing to make payment will result in the whole amount being due and payable.
The biggest mistake most SMEs make is that they have a concern about upsetting their customer. The reality is that if your customer does not pay and makes no reasonable attempt, then you don’t want them as a customer in the future anyway. You need to take the emotion out of it.
If the account is overdue for more than 60 days, refer it to a debt collection agency offering a no recovery, no charge service; overdue debts from as low as $50 should be referred for collection.
If it comes to the point where the collection agency is unable to recover your debt they will recommend taking legal action. It may sound daunting but it is simpler and cheaper to sue than you think.
Having your trading terms and new customer form in place will make suing far easier. This provides you with all the information you need to take action: their name, address and a signed copy of your trading terms if you included them.
The better your paperwork, the easier it will be for a lawyer to handle your claim. Accordingly, ensure you always keep copies of all quotes, invoices, emails and make summary notes of key conversations. It may sound pedantic but it could be the difference between being paid and not receiving a cent.
In our experience, when a complaint is issued against a customer, about 80 per cent will result in a default judgment being obtained. Of the remaining 20 per cent where a defence has been lodged, four out of five result in a negotiation and settlement. Only a small percentage will actually proceed to a court hearing.
Once judgment has been obtained, you are then free to proceed to various legal enforcement processes, which include:
• Bankruptcy – this can only be used against individuals and the total judgment must exceed $5,000
• Warrant of execution – the Sheriff seizes goods which are put up for sale to cover the judgment amount
• Garnishee of wages – a specified amount is deducted from the customer’s pay packet by their employer
• Wind-up of companies – if the debt exceeds $2,000 and you have a judgment for over $2,000 you can commence a process which will result in liquidation of the company. This usually results in the debt being paid.
Additional cost orders are usually made by the court for each enforcement process.
The legal system provides a powerful tool for any business which is owed money and businesses shouldn’t be afraid of threatening action.
Provided you have the basic foundation of strong trading terms and a new client form, taking legal action is a straightforward process.
About the Author:
The writer is CEO of Prushka Fast Debt Recovery Pty Ltd and is a principal of Mendelsons Lawyers Pty Ltd. Prushka acts for in excess of 50,000 small to medium size businesses across Australia and operates on the basis of
NO RECOVERY – NO CHARGE service. The writer is also the author of ‘The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival’.