Payment overdue

When the headlines are singing out the ‘good times’ there’s even more reason to be cautious about your debtor management and credit control policies.

The news bulletins and financial headlines are all very encouraging as 2014 heads towards the end of its first quarter: ‘Business confidence at its highest in 20 years’; ‘Consumer confidence at a seven-year high’; there are even predictions we will ‘top the OECD growth stakes’ this year. It’s all very heady stuff.
But away from the headlines, Australia has dropped from boom to average, and commercial defaults in New Zealand last year were 42 percent up on 2012 and consumer defaults in the last quarter of 2013 were 32 percent worse than the previous year-end.
The experts NZBusiness consulted for this story were of one voice – you are never more vulnerable than when you loosen your grip on the basics in anticipation of better times. They are seldom as good as predicted.
John Blackmore, national sales manager for Bibby Financial Services, a debtor finance specialist, offers his ‘debtor management fundamentals’ for business owner managers.
“SMEs must have a clearly articulated credit policy and terms of trade. Credit policies need to be routinely reviewed to ensure they are appropriate for the company’s risk profile. The credit policy should be clearly articulated in writing to all debtors and understood by all staff,” he says.
“Terms of trade – reviewed by solicitors as legally compliant to ensure there will be no impediments to any needed recovery process – should be documented and cover areas including prepayments, down payments, terms and discounts for early settlement. Do they have 30, 60 or 90 days to pay? When will action be taken against them and are the costs of recovery included? All quotes, estimates, invoices, contracts, agreements, purchase orders, and related documentation should refer to your terms of trade and credit policy.
“To minimise any misunderstandings, all information on the nature of work/products supplied; quantities; timings; and the structure and method of payment should be clearly stated. We also recommend getting acceptance of terms in writing,” Blackmore says.
This is all clearly good advice – but how well do New Zealand’s SMEs follow these procedures?
“We come across companies which have no terms of trade signed; a total no-no if you are offering credit terms,” answers David See, GM of ICMS CreditSystems and Waterstone Recovery. ICMS is a privately-owned New Zealand company specialising in debt management and credit reporting services. “The worst is when there is a signed terms of trade, but the company has lost it and it cannot be found.
“All SME owner managers must archive seven years of records and make sure original hard-copy documentation can be located when needed.
“Persistence is the key to our success,” See continues. “We deliver results through persistent and efficient debtor contact and the ability to customise collection strategies to maximise the returns to our clients.”

Mind your accounts receivable
Before we get to what happens if you fit into the ‘I know I have it somewhere’ category, let’s get further advice on how to do this essential-but-not-very-sexy part of establishing and consistently running (not loosening your grip on the basics) a sustainable SME.
The experts agree that having all of your staff understand the importance of this side of running the business, however dull they might think it, is critical.
Blackmore again: “Your accounts receivable processes have to be clearly mapped out and fully understood by staff, with the timings of various communications (letters/emails/phone calls) set in stone. If there is a dispute on an aspect of an invoice, push for payment of the non-disputed amount, to maintain cashflow.
“Credit checks for new and existing customers should be carried out routinely to identify issues which can influence credit limits. Credit data products such as ledger monitoring and alerts are increasingly available to identify any deterioration in credit-worthiness,” says Blackmore.
“And, the not always obvious one: scheduled reviews of credit limits to ensure agreed settings are still appropriate for individual debtors. Routinely monitoring the ‘days outstanding’ (DSO) is critical to identifying adverse trends in the debtor’s ledger and ensuring prompt action,” he adds.
That essential information necessary to diligently maintain credit checks is where two household names in this game come into play: Veda and Baycorp. Formerly a combined entity, today they provide complementary services.
“Bad debt can quickly turn a successful SME into a bankruptcy statistic,” says Matt Paterson, Veda’s GM Sales. “Each year bad debt will cost New Zealand businesses hundreds of millions of dollars. This is particularly relevant to those working in services based industries where it is impossible to recoup losses once a client has defaulted on a payment as there is nothing tangible to recall.
“Few business owners understand the importance of a simple credit check and how easy it can be to protect your business from bad debt,” says Paterson. “We believe the more you know, the better prepared you will be.”
“We also have two sayings,” he says. “A sale is not a sale until the money is in the bank; and Spend beans to save thousands.”
Payment is slow, credit is tight and bad debts are seriously on the rise, says Paterson. “Yet, many companies continue to ignore the problem, spending more on things like coffee and tea than protecting their business from going under.
“Sadly, today’s economic environment has exposed the most unexpected individuals and companies, so rather than wait to find out things are turning sour, look for tell-tale signs, like payment anniversaries lengthening from 30 to 60, or 90 days. Build an internal alert system and proactively monitor and manage your customers who struggle to pay.”
Paterson says you should never assume your customers and their businesses will stay the same. His company provides a number of specialist services to provide SME owner managers with the most relevant and up-to-date information.
“Check their current credit health with our Commercial Credit Check and be alert to business changes with Veda Alerts, which can advise when a company director changes or when defaults are loaded against a director.”
VedaScore Plus provides a credit score for individuals, based on risk, and Commercial Plus assesses companies on their ability to pay. Commercial Check Reports verify the incorporation registration details of a business, the directors managing the business and the owners. They include a summary and list of credit enquiries that have been made on that company, and an indication of any adverse information held on Veda’s Commercial Bureau.  
“Adverse information may include listings of previous insolvencies, court judgments, bad debt collection, payment history, or defaults where a company has fallen behind on payments,” says Paterson.
Importantly, a Commercial Plus report also provides the personal credit history of all the listed directors of a business, and assesses their ability to pay.  
“Looking into their credit history is equally as important as checking up on the company,” says Paterson. “Make sure you have their consent first – and if they’ve got nothing to hide then they won’t even mind. But if they do, then you’ll be thanking your lucky stars you checked first.”
Paterson has three other essential tasks you should set yourself:
• Do you really know who you are dealing with? Part of your credit policy should include finding out who is actually behind the business that is applying for credit. You could find yourself at the end of a chain of interlinked companies.
• Make sure the asset you think you have hasn’t been secured by another supplier. Another company – even one of your competitors – might already have rights to claim the asset if bills are unpaid or your customer goes bankrupt. (Veda’s enhanced search filtering and sorting of the Personal Property Securities Register assists to swiftly focus on the key security interests.)
• If customers fail a credit check either at the outset or later, request a personal guarantee. Get them to provide a director or shareholder guarantor who is financially sound. That way you won’t be out of pocket should they fall behind on payments, exercising your right for those outstanding monies on demand.

“At the other extreme, when customers go AWOL don’t write off the debt and don’t give up trying to find them. Vedatrace has up-to-date address information thanks to daily data flows into our system. And if you can’t locate them then it may be a job for a collector,” says Paterson.

Debt collection
David See at ICMS says debt collection is at the heart of their service. “Our ‘secret’ is the vast experience of our account managers, the majority of whom have been with us for more than ten years. They pass on their knowledge and skills to the new recruits.
“Debt collection is a very physiological process. Both we and the debtor have a conflicting goal where the debtor is trying to avoid paying and we’re trying to collect. We don’t get paid if we fail, as ICMS has a ‘no collection/no fee policy’ So, when our account manager first speaks to the debtor, he/she must learn to read the debtor through the phone.
“We first strive to obtain payment in full, and failing that, an adequate payment arrangement. Both these require strong negotiation skills. There are times when some debtors will start swearing or refusing to negotiate, but our professionals have learnt some just need to vent the stories of their life and these are the ones who end up paying their debt off eventually,” says See.
Baycorp is a name that springs most readily to mind in this part of the world when a debt needs collecting. Being the sector leader means you have to be at the forefront of technological advances – as they happen – but with the due diligence and care that comes with being a polished brand.
Grant Jorey, CEO Baycorp Australia and New Zealand, says they have invested millions progressively in the past 18 to 24 months in Internet portals and advanced functionality on the client side, which will come on stream this year.
But this is no GCSB or NSA ‘Big Brother’ type operation.
“Integrity is one of our three core values, so you won’t find us pretending to be a friend on Facebook, for example. But we do use social media to build and constantly update our contact database which will keep us at the forefront of tracking debtors, reluctant to pay what they owe.
“Both from the perspective of our own reputation and that of our customers, who, in the main are brand-leaders in their own right, we cannot afford to get involved in anything that is not wholly above-board,” says Jorey.
Do not, however, if you are a scamster, think you can get away with running up a trail of debt, because you now assume debt collectors are boxing with one hand tied behind their backs. They certainly aren’t – and that’s good news for owner managers across New Zealand. Baycorp’s investment in technology is going to cut out those escape routes. A baddie is up against:
• The largest database of defaulted debts in New Zealand.
• Skip tracing sources new address and phone leads regularly from many different providers, while an automated internal ‘data washing process’ links files with the most current contact information.
• Telephony technology – use of a Castel Predictive dialler, capable of one million calls a day, coupled with ‘intelligent message delivery’.
• Answering machine detection: new technology allows them to record and play messages to either live customers or answer machines. The dialler is able to identify whether an answer machine has answered the call and then leave an individualised recorded message.
   “In the situation where an answer machine hasn’t been detected by the dialler, our collectors are able to use a press key entry to deliver the recorded message. This is a significant development in demonstrating that we have made contact with a debtor,” says Jorey.
“Interestingly, our research has found when the Generation X and Y debtors find themselves in ‘an uncomfortable situation’ they prefer to communicate online on their smart phones, rather than any other method to deal with their predicament. So technology is also being used to enable debtors to contact us as they prefer, too.”
Any final advice for SME bosses?
“If a debtor is juggling debts, rest assured that s/he will first pay the company that has the support of a professional debt collection system working with the debtor to find a mutually acceptable and sustainable resolution,” Jorey says.

Kevin Kevany is an Auckland-based freelance writer.
Email [email protected]