We often act for clients in recovering debts owed to their company. While we encourage our clients to recover these debts themselves, especially if there are good prospects of recovery, our clients are often surprised to find there are many things they can do to eliminate or reduce their outstanding debts!
While you can recover debts based solely on an unpaid invoice, having a written agreement will put you in a much stronger position. With no written agreement, there may be ambiguity as to the exact terms of the agreement. Doing this means you spend less time trying to remember conversations, reviewing quotations, and showing that your customer has received your goods and/or services.
To streamline your debt recovery process, and hopefully reduce costs, you should have a written agreement with the customer detailing the likely cost of your goods or services. In our experience, it is best practice to have an agreement which you can tailor, as needed, to each customer’s needs. Even if at the time it is not convenient to provide the whole agreement, consider sending a quick email to the customer setting out an estimate of the likely costs and provide the formal agreement at a later stage.
Terms and Conditions
In a perfect world you should provide your customers with a written agreement containing your terms and conditions. If possible, make sure you get these terms and conditions signed by the customer prior to providing them with the goods and/or services.
To best protect your business, you should ensure your terms and conditions:
- Clearly set out your payment terms (i.e. the time frame within which your invoices must be paid);
- Include a provision requiring the client to pay a reasonable amount of interest on overdue invoices;
- Include a provision requiring the customer to cover your out of pocket expenses in the event of a default like your debt collection and legal costs. We recommend that the costs payable be on an indemnity basis to allow you to recover all costs reasonably incurred;
- Consider offering customers incentives or discounts for paying early;
- Get security in the form of a charge over property. This will allow you to register a caveat on their property. You may consider having an internal policy which details when you will register a caveat or assess it on a case to case basis; and
- Alternatively (or in addition) you may get a security interest which you can register against the company’s goods or intangible property on the Personal Property Security Register (PPSR).
If you have a website, you should consider making your terms and conditions available online.
Another way to protect your business is to ensure that personal guarantees are provided by commercial clients. This is where a director of your customer’s business signs a form agreeing to be personally liable for the debt of their company if their company cannot pay.
When considering whether to ask for a personal guarantee, you should:
- Consider conducting a bankruptcy search on the person giving the personal guarantee;
- Make sure you get your personal guarantee checked by a lawyer to ensure it is enforceable; and
- Consider having all the directors of the company provide personal guarantees.
A personal guarantee increases your prospects of recovering debt, which is particularly useful in the event your client’s company becomes insolvent.
Credit management is the means by which you recover the debts owed to your company. Most companies have credit management procedures and processes in place. However, there is substantial difference between credit management and good credit management.
Good credit management involves being on top of all your outstanding invoices and knowing how much each customer owes you and when they are likely to pay. Once payments are due, you should diligently follow up your customers. This can include:
- Sending an invoice to the customer as soon as the work is completed;
- Sending a statement to the customer towards the end of the trading terms;
- Sending a reminder letter 14 days’ after sending the statement; and
- Following up with a telephone call within 7 days and keeping file notes of all conversations.
When following up payment, it is important to maintain a professional relationship with your client. It may be the case that the accounts manager is on leave and someone has forgotten to check his/her emails or there may be a short-term problem which has resulted in non-payment. If this occurs, you may consult with the customer and negotiate a solution to resolve the matter.
If there is no response or an unsatisfactory response from the customer, it is important to then pass the file on for legal recovery action. At this stage you may also consider registering a caveat or a security interest on the PPSR (provided your terms and conditions allow it). If there is a promise to pay which subsequently falls through, you should follow up with a telephone call before passing the file on for legal recovery action.
If you need help recovering your debts or taking proactive steps to reduce the debts owed to your company, please contact the team at Taurus Legal Management on (03) 9481 2000.