Are you sick of losing money on bad debtors?

I am sure at some time during your life as a business owner, you have been stung by some bad debtors. You completed the job in good faith, and then your customer didn't pay you! I have not yet come across anyone who hasn't had this happen to them, myself included, and in every case without exception, at best it has cost you profit and time, and at worst, it has put your business in serious jeopardy or even killed your business completely.

I think it's fair to say that this is a real problem for any business. Therefore it is important that you are keeping this downside to a minimum. It is a disturbing trend I am seeing more often, especially in but not limited to trades businesses.

I have put together here a list of preventative measures, from my own experience and also from advice I have gleaned from lawyers and debt collectors over the years.

I have tailored these specifically for trades and service businesses, but they will apply to other businesses also. Let's jump in!...

Your Terms Of Trade
With any quotes you complete, it's important to include your "Terms of Trade" which should be referred to in your signed quote (yes you should definitely get your customer to sign the quote to officially accept it, and prior to work starting). The "terms of trade" are the terms you will complete the job under and give an outline of responsibilities for both you and your customer. It usually includes standards of work, what happens if there is a dispute, payment terms, guarantees etc. 

A good "terms of trade" will reduce potential arguments with your customer if things go wrong. When completing a "terms of trade" here are a few important things you should always include:

• Notice period for any dispute or problem with workmanship (within 7 days of completion or invoice is good).
• Any charges incurred for collection of payment can be added to the bill.
• Interest can be added on overdue amounts.
• Clause agreeing that you can register their debt under the Personal Property Securities Act 1999 (PPSA). This is a national debt register you can register your invoice against until paid - it means that if your customers company goes broke, you have a priority of payment over others not registered. You still need to list the debt on the register for this to be valid.
• Personal guarantee (with larger companies you deal with, these are usually difficult to get, but can be possible with smaller companies).

I recommend that you get a personalised copy of "Terms of Trade" for your business from a debt collector. They know the rules and often already have something that is easily adapted. They usually only cost a few hundred dollars and are well worth it.

Spread Your Risk
Make sure you have a good base of customers rather than relying on one of two large ones only. Then if something goes wrong with a major customer you still have a business!

Terms Of Trade From Your Customers
Sometimes larger building companies or corporates will ask you as the supplier to them, to sign their terms of trade. Look through these very carefully as they are written in favour of them not you, and they have expensive lawyers! Be prepared to negotiate anything you disagree with. I will often cross out clauses or make additions before signing these.

Here are a few things to watch out for before signing:

• Make sure there is a notice period if they are not happy with workmanship; otherwise if there is a dispute it's hard to get a debt collector involved as debt collectors can't collect disputed amounts.
• Check payment terms: when, and if overdue, can you charge interest?
• If a debt collector is required, can you recover collection charges?
• Make sure that you are not made responsible for things outside your control i.e. other subbies work. 
• Any penalty clauses for work not completed on time.
  
  

When Taking On New Customers

• In addition to the "terms of trade" it is also recommended that you get your customers to complete a "credit application form" - this helps gather all the relevant information about the creditor, which you then have on hand if you need to track them down later, and can be vital if it ends up going to debt collection.
• If your customer is a company, then check out some of their other suppliers to see if they are getting paid; if not, this is a bad sign!
• If you are concerned, get your debt collector to check out their liquidity and payment history.
• Wherever possible negotiate deposits up front on starting, or progress payments at various stages of the job. 
• Make it clear that payment on time is important and get agreement from your customer to pay when due. 

When Jobs Are Completed

• Invoice the job ASAP, and state due date on the invoice.
• Make it easy for your customer to pay you - put your bank account details on the invoice.
• Check your debtors list at least weekly, and follow up any overdue amounts. Delegate this task if necessary - but make sure someone is doing this.

Overdue Amounts

• If your customer can't pay, then get a payment plan in place, and make sure they stick to it.
• Keep in regular contact until paid. Remember your customer has to pay someone or they are not in business - by keeping the pressure on, it's much more likely to be you, rather then someone else.
• Be proactive. If the customer is unhappy with your work, then talk with them early. In most cases the longer it is left, the less likely you are to be paid.
• Be tough and be prepared to walk off the job or stop supplying if necessary. The more jobs = the more money owed = the bigger the risk to you.

Existing Bad Debts

• Don't be afraid to negotiate to reduce the debt and actually get paid something - if you need to. A bird in the hand is better then two in the bush that fly away and leave you with nothing.
• If the amount is in dispute and under $15,000 one option is to file an application at the "Disputes Tribunal". You can this yourself without the cost of lawyers. Check outhttp://www.justice.govt.nz/tribunals/disputes-tribunal
• If after a few months, you are not getting anywhere, then hand over to a good debt collector.

Note: In my experience a good debt collector is very proactive with phone calls and regular contact putting continued pressure on the debtor. Find out exactly how they will go about collecting the debt. If it's just sending a few letter with no follow up, this is usually not enough.

These things will help reduce your risk, but the only real guarantee in all of this is when the money is in your bank account not theirs. 

Remember you have provided goods or a service for your customer, and you deserve and need to be paid. You also have bills to pay and if you don't get paid, you can't pay your suppliers, your employees, or put food on the table for your family.

This article is really about protecting you from those bad debts that destroy your profit for the year or even wipe you out. The large building company, for example, that goes broke, takes lots of subcontractors with them. So reduce the risk and keep your exposure to a minimum - if you have a few small bad debts that's okay- you will survive those - it's the larger amounts you need to really pay attention to. 

Action Points
1) Get your "Terms of Trade" sorted or updated and start using them with all your customers. Yes even the old ones.
2) Be proactive with your overdue debtors - check them weekly and chase the overdue ones.

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