Relationships with your Debtors - Tips on avoiding bad debts – Once you know your customer have someone vouch for them

Posted by Luke Mitchell on 15 September 2016
Relationships with your Debtors - Tips on avoiding bad debts – Once you know your customer have someone vouch for them

Our last blog focused on the importance of obtaining accurate customer details right from the outset of the business relationship. If you cannot readily identify who it is that owes you money, your prospects of recovering that money are not particularly strong.

Once you know who your customer is, the next step is to satisfy yourself that the customer will have the ability to pay the invoices that your business will issue to it. 

There are two key things that a business can do to at the start of the relationship to maximise the likelihood that invoices will be paid:

  1. Investigate the client by:

    - performing credit checks of the relevant entity and its principals; and
    - ask the customer to provide trade references and check those references;

  2. Obtain security by:

    - where you are selling goods, register your interest in those goods on the Personal Property Securities Register;
    - take a deposit of at least the equivalent of your costs of manufacturing the relevant goods and/or providing the relevant services;
    - obtain personal guarantees.

Given that past behaviour is a reliable indicator of likely future behaviour, the importance of properly investigating a new customer to whom your business will be extending credit cannot be overstated.

Obtaining security, particularly through the provision of personal guarantees from the principals of your customer, provides the customer with a strong incentive to ensure that the invoices issued by your business are paid in full. The large majority of bad debts that we see have not been guaranteed with third parties. As a result, especially where there is a company structure involved, there are little to no consequences to the principals of the debtor for the non payment of the debt.

The best way to protect your business from bad debts is to get things right from the outset of the customer relationship.

We specialise in providing clarity and confidence to business operators in their legal relationships with their customers. If bad debts are a problem for your business – or if you want to take steps to best protect your business from a bad debt crisis -– contact us and benefit from our knowledge and experience.