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How to get your customers or clients to pay up

Written by: Michael Smyth

Article Overview: When the 20th of the month ticks around and your bank balance isn’t looking as healthy as it should, you know you have a problem. A quick look at your debtor’s ledger reveals that there is a lot of money out there but it is no good to you unless it is sitting in your bank account earning interest. So what do you do to get it in?

How to get your customers or clients to pay up

First, have a system
This may seem like an obvious strategy, but one which many businesses neglect to their downfall. By a system, I mean having a process for collecting unpaid fees. The system can be whatever you want and is likely to contain a combination of written reminders and telephone calls in whichever order works for you. Each step of the system should be implemented on a predetermined date without fail by someone assigned to the task (who preferably ought not to be you). For example, on the 20th of the month a first written reminder goes out. 7 days later the client receives a phone call and 7 days after that a second and final reminder etc.
The purpose of this system is twofold. First, by having a pre-determined system you actually remember to chase your debtors. By automating the process you can save yourself time as well. Second, it is to educate your customers to pay on time. If they know that they will be chased on given dates they are much more likely to pay on time.

What if they still don’t pay? Self help options
Most customers are honest (we hope) but of course you will get the odd one or two that will play your system. In other words, they will leave it to the very last reminder to pay and even then may not do so. That’s when you need to create an extra incentive. Charging interest on a given date is a good way to do this: Just make sure your terms and conditions allow for it.

If you have supplied a product to your customer then there may the possibility to retake possession of it. However, your ability to do this will be dictated by your terms and conditions of business. Make sure they are properly drafted by a lawyer. If that it is not an option for you, another option may be to suspend the future supply of services or products. This will have the desired effect if your customer needs your product and services to do business but not otherwise. They may just find another supplier, leaving you to take a more ‘legal’ route.

What about legal action?
If you have exhausted your self help remedies and still haven’t received payment, then the next step is to consider legal action. The place to start is with a lawyer’s letter and often this will be enough to do the trick. However, some customers may perceive a lawyer’s letter as an empty threat so you need to have a back up plan.
So, the next step is to serve a statutory demand. This assumes that the debt is over $1,000. A statutory demand is a precursor to insolvency proceedings. In other words, if the customer doesn’t pay on service of a statutory demand you have the ability to start legal action to wind up the company or make the person bankrupt.
You need to think carefully whether this is the route you want to take. Legal action of this sort will cost money and if there is a limited chance of recovering your debt because the customer has no money, you may be better off letting things lie.

The customer disputes the debt
If the customer disputes the debt, the statutory demand procedure is not available. This means to recover the debt you must first show that the debt is owed. If the sum claimed is less than $7,500 then the Disputes Tribunal is the place to go. If it is over $7,500 then you must file a claim in the District Court. No lawyers are allowed in the Disputes Tribunal which makes the process much cheaper. It is also less formal.
If your claim ends up in the District Court it becomes more complicated and using a lawyer is advisable. It is possible to restrict your claim to $7,500 and bring the claim in the Disputes Tribunal to avoid the cost of the District Court, and this is often advisable to get the benefits of the more informal procedure. However you can’t bring a claim in the District Court if there is no dispute over the debt – instead use the statutory demand procedure.

Alternatives to legal action
There will be many businesses that would prefer to stay away from getting involved in legal proceedings for fear of the cost and time expended. An alternative option is to register the debt with an organisation like Baycorp. This has the effect of putting a black mark against the customer’s credit rating and may hinder them from obtaining future finance. However, Baycorp will remove such registrations if the customer is able to show that the debt is disputed. So registering the debt may not take you much further.

Should you use a debt collection agency?
Then there are debt collection agencies. They may use a variety of means to recover your debt and are likely to simply employ one or more of the methods detailed in this article. If you use a debt collection agency make sure you understand their basis of charging before instructing them. Most agencies will charge a percentage of the amount recovered and there may also be a base fee on top. They may even charge a fee if they don’t recover your debt or the debtor pays voluntarily. Therefore, you should assess the viability of a debt collection agency before signing any terms of engagement.

Are factoring companies a viable option?
A way to avoid having to collect any money at all is to factor your invoices to a factoring company. What happens here is that the factoring company will take an assignment of your invoices for less than their face value. In other words, they pay you straight away and they have the responsibility of collecting the money. They make their money from the difference between what they are able to recover and the value of the invoice.

To make factoring a success you need to make sure you have sufficient margin in your invoices to cover the factoring costs. The obvious advantage is that you get your money straight away, but you don’t get the full amount. So before you engage a factoring company check their terms and conditions fully, firstly to make sure there are no hidden changes and secondly, to make sure you don’t have to refund any money if they are unable to collect.

Is collecting the debt viable in the first place?
There will be some situations where collecting the debt may not be a viable option given the cost and time involved for your business. No one likes writing off bad debts but sometimes it is the most cost efficient thing to do: making money is sometimes more profitable than saving money. And as for that bad debtor, they do play the system, but take some comfort in the law of nature which says “what comes around goes around”.

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Article Tags: bank balance, debt collection, debtors, factoring



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