Post-xmas debt hangover: tips for businesses

With many excited shoppers having ticked up items over Christmas, now is the time to follow up – for every six months waited there is a 20 percent less chance of recovery, so the sooner companies start working consumer debt, the sooner and more likely it can be collected. 

Each year, bad debt costs Kiwi businesses hundreds of millions of dollars. Small and medium sized enterprises (SMEs) particularly feel the pinch, as there is often less liquidity and a tighter cashflow than larger corporates.

Lyn Egan is the Tauranga-based Baycorp NZ business manager and shares some of her best practice 'to do's' on how to stave off bad debtors.

Egan says SMEs should start with a credit check, to find out as much as you can in advance about new customers or creditors. 

“It is always a good idea to run credit checks on new and existing customers. Build a profile – get to know a potential customer before doing business.

“A common mistake we see is that people don’t check the correct legal entity of a business – get as much information as you can about a prospective customer so you can build a robust profile.” 

Tauranga-based Altex Coatings Limited, which specialises in protective coatings, linings and fireproofing, uses Baycorp’s credit reporting service (CRS) to get quality information on new customers wanting to establish an account.  

Altex credit controller Lesley Park says this service has been invaluable in allowing her to obtain credit information about the customer, including their company and ownership details, before they are approved.  

“We can then follow up any discrepancies in the information they give us and what the credit reporting service provides.” 

Egan says another top tip is to be punctual with invoicing, as customers are more likely to pay when invoices are issued accurately and on time. 

“Chase up late payments by sending customers timely reminders regarding payment terms. This can easily be done through email, a phone call or by post.”

Egan says it’s important to ensure the business has a credit policy for all customers that is understood and adhered to by staff. 

“Ensure that there are processes in place to regularly check your credit policy to ensure that it is up to date and reflects your business’ risk profile.

“If all else fails, make sure you speak to a debt resolution agency sooner rather than later – businesses will have a much better chance of recovering outstanding debts if they take action quickly.”

 

 

Make sure you have clear Terms of Trade which are communicated at the start of the business relationship, available on your website and/or distributed with your invoices. Ensure your terms allow for the recovery of collection costs which means that any debt resolution charges can be passed on to the customer. We also recommend you allow for a personal guarantee when you are dealing with a limited liability company. 

 

Nobody wants to be in a position where they have bad debt(ors) so we suggest finding out as much as you can in advance about new creditors. Build a profile – get to know a potential customer before doing business. A common mistake we see is that people don’t check the correct legal entity of a business – make sure to get as much information as you can about a prospective creditor so you can build a robust profile. 

And if you haven’t it could be a good idea to also run credit checks on existing customers in particular, the ones with which the financial exposure to your business is high.

 

A simple credit check can protect your business from potentially harmful debt and can assist you to set up terms of trade with clients to mitigate bad debt. It is crucial to match terms of trade to your creditor's financial health.

 

Invoice customers as soon as practically possible. Customers are more likely to pay when invoices are issued accurately and punctually. 

 

Send customers timely reminders regarding payment terms. In today’s age this can be done through email, calling or snail mail. The more overdue payments are, the harder it becomes to recoup costs.

 

Ensure you have a credit policy that is understood and abided by all staff. It is important that the same rules are applied to all customers. Ensure that there are processes in place to regularly check your credit policy to ensure that it is up to date and reflects your business’ risk profile.