The best way to deal with bad debtors is to implement standard contracts and procedures within your business to actively reduce or eliminate them in future. A contract will exist when your business agrees to perform works or supply goods for reward regardless of whether the contract is in writing. The incorporation of standard terms and conditions into the negotiation and acceptance stage of a contract will help reduce the consequences of dealing with bad debtors and improve cash flow.
When negotiating a contract the most important thing to know and appreciate is who you are contracting with. If you are contracting with a business you should know if the business is a sole trader, partnership or a company and ensure that you record their correct company name or partners’ names, ABN and the location of their principal place of business (not only a PO Box address).
Your business may have difficulty recovering a debt from an insolvent company even if the director who you dealt with has sufficient resources to pay the debt personally. Directors’ guarantees can be easily included in a contract by the use of standard terms and conditions and signed Acceptance pages. If your business implements a policy that all contracts with unfamiliar companies must be guaranteed by a director you will save considerable time and expense and reduce write-offs if you are able to recover the debt from a guarantor, especially if the company is insolvent.
If you have contracted with a partnership, there may be other partners of whom you were not initially aware, who will be jointly liable for the debt even if the partner that your business dealt with is insolvent or bankrupt.
Apart from losses due to write-offs, the most obvious consequences of bad debtors are the opportunity cost of utilising the money owing in the conduct of your business, including by receiving interest, and the usually unrecoverable cost of taking pre-Court recovery action. These consequences can be overcome by the use of standard terms and conditions. Standard terms and conditions are easy to implement. They can entitle your business to reimbursement of debt collection expenses as well as interest at an agreed rate.
Many businesses waste valuable time chasing debtors on the telephone and sending letters that get ignored. The time and money spent dealing with bad debtors are valuable resources of your business. When dealing with bad debtors you should, therefore, be prepared to compromise the debt in order to receive payment quickly (and avoid costs associated with Court proceedings) and/or refer the matter to a professional in the event of a dispute or once it is clear that payment will not be forthcoming.
Where the debtor is unable to pay the debt in full immediately, the negotiation of an instalment plan and the execution of an appropriate Deed can eliminate any potential for the debtor to subsequently raise a dispute and may include additional guarantees or security to ensure that payment will be recoverable in the event of a default or the insolvency of the debtor.
You are better off spending your time running your business than dealing with bad debtors or being involved in Court proceedings. These approaches can save your business thousands of dollars in legal fees as well as the time and headaches involved in Court proceedings.