While growing your business it can become easy to lose sight of effectively managing your debtors, however doing so, can help your business continue to grow successfully.
The information below can help make the task of controlling business debtors much easier!
The information is for general purposes only. As always, we recommend you seek legal advice if you have any concerns.
Have terms of trade in place before extending credit and know who is behind the business
Make sure you put all terms of trade in writing, always! It’s surprising how many businesses still supply goods and services by informal arrangements. Having terms of trade in writing is an effective way of minimising and preventing bad debts arising.
Another important factor is to complete thorough credit history and business reference checks before offering credit to new potential customers. Be upfront of your terms of trade and credit limits and put these in writing. Ensure the new customer signs acceptance of your terms of trade.
If you are unsure as to whether your terms of trade are exhaustive, we recommend you seek legal advice from one of our experienced lawyers.
Know who owes the money – do an ASIC search
It is vital to perform background checks on potential customers before commencing a business relationship with them.
The only way to know whether a business you want to deal with is in administration, liquidation or deregistered is on ASIC Registers. This is an easy and quick way for weeding out any customers that do not have the ability to pay you.
Know the rules about serving letters of demand / statutory demands – time limits, thresholds, and service requirements
We strongly recommend you have a letter of demand template your business can use should the need arise. A letter of demand should include:
- accurate information;
- a clear intention to commence legal proceedings if you are not paid by a specified time;
- attached copies of any relevant supporting documentation.
The letter of demand should be signed and a copy should be kept for your records. We recommend you speak to one of our lawyers who can draft a letter of demand template customised to your business.
You should also be familiar with Section 459E of the Corporations Act 2001 (Cth). This section deals with statutory demands. A statutory demand is a written request for payment of debts owed by an insolvent company. The debt owed must be over $2000.
A statutory demand requires a debtor to do one of the following:
- pay the debt they owe you;
- secure or compound for the debt; or
- make an application to set aside the statutory demand.
The statutory demand must be drafted in its prescribed form.
The debtor company has strictly 21 days to comply with the statutory demand, otherwise a legal presumption will be raised that the company is insolvent. Once this occurs, you can apply to the Federal or Supreme Court for an order that the debtor company be wound up in insolvency.
You must also satisfy the service requirements of a statutory demand which may be done by leaving the statutory demand or posting to the company’s registered office. You can also deliver a copy of the statutory demand personally to a company director. It is critical that service of the statutory demand is done correctly, and service is evidenced in an Affidavit of Service.
It is obvious from the above that procedures involved in making a statutory demand can be complex. We strongly recommend you seek legal advice to prevent your statutory demand from being set aside.
Educate your credit control team
It is vital that all staff in the credit control team are on the same page when it comes to your business’s credit control policy and procedures. We recommend you have regular meetings to go through credit control policies and what changes need to be made, if any.
It is important to ensure that all staff understand the terms of trade. Taking some time out to ensure all staff clearly understand the terms of trade can prevent unnecessary debt chasing down the track.
We also recommend you hire an expert in credit control to provide training to staff in how to become a better credit controller or outsource your debt control to a debt collection expert.
Keep notes of phone calls, etc. when chasing money
If you find yourself chasing money from a debtor, it is critical to keep a record of phone calls, emails, letters of demand and other documentation supporting your claim. It will also make it easier to keep track of your dispute.
Conclusion
The key to controlling business debtors is prevention! Having clearly written terms of trade and knowing who your debtor is and their history of paying debt, minimises the risk of you having to chase them for money in the future.
Training and educating your credit control staff is also vital to ensure they are on board with the business’s trading procedures and policies and are effective in carrying out these procedures and policies.
Even if you believe you have your business covered with effective debtor control practices, we still recommend you seek advice from an experienced lawyer to give you peace of mind.
If you or someone you know wants more information or needs help or advice, please contact us on 02 4625 3755 or email [email protected].