Posted Under: General
Like festering wounds, bad debts in your business insidiously drain both your time and your profits. And like any infectious disease there are three pillars of intervention which must work seamlessly together to not only purge the disease of bad debts but also prevent future re-infection.
Leave any one of these three levels of care out and you’ll remain both easy prey to parasites and powerless to stop them.
Level 1 Debt Management: Prevention
Just as there are inoculations to prevent diseases taking root, there are powerful tools to boost your immunity against bad debts.
For total protection your business needs to be armed with all of the following instruments as well as the systems to use them.
Conditions and Terms of Trade: No matter how big or small your business, if you supply goods or services comprehensive Terms of Trade will protect you and your business from financial loss.
In essence Terms of Trade are a set of powerful legal documents that spell-out the specific conditions under which you and your customers carry out business together. Now this involves more than just credit abuse. There are 52 acts of legislature which can strike you down. Accordingly your Terms of Trade must close-down each and every one of these potential pathways of infection.
Credit Checks: As they say… “An ounce of prevention is worth a pound of cure!” So before extending any form of credit to a new customer it’s crucial that you x-ray their creditworthiness. The fastest, cheapest and easiest way to do this is by being set-up to conduct online credit checks. A word of caution: to carry out a credit check you must be authorized to do so. If you conduct a credit check without this authority you’ll be in breech of the Privacy Act and in turn be liable to pay a $200,000 fine. The only way to conduct a credit check in compliance with the Privacy Act is to have bullet-proof Terms of trade that authorize you to do so.
Personal Property Securities Register: - For a mere $3, you can possess tremendous power over both your goods and you debtors. Yet few people have any clue how powerful PPSR is nor how easy it is to use.
Bomb-Proof Documentation: Finally, to fully reinforce your defenses against bad debts, depending on the nature of your business you need at least three of the following documents: Application for Credit; Quotation/Work Authorization; Quotation Variation; Job Completion; Personal & Corporate Guarantees; Authority to Supply Goods; and Agreement to Hire.
Prevention is without doubt the most neglected layer of protection and it’s absence dramatically undermines the effectiveness of the following two strategies. Conversely, with these tools in place you’ll possess the full power of the law to both prevent and recover bad debts.
Level 2 Debt Management: Home-Cures
As with minor infections, there are quick and easy remedies to heal the wounds of common bad debts. The best “home-cure” for recovering bad debts is a rapid-fire prescription of 3 potent pills.
Debt Pill 1: Debt Reminder Letter. Prescribe as soon as debt falls overdue.
Debt Pill 2: Debt Follow-Up Phone Call. Dispense if debtor does not respond to debt reminder letter after a week OR they default on repayment installment.
Debt Pill 3: Debt Final Demand Letter. Administered if debtor does not respond to follow-up call within a week OR they default on repayment installment.
It’s of paramount importance that you stick-to this simple yet powerful three step formula. Under absolutely no circumstances should you send out more than 1 reminder letter as doing so will not only encourage slow payment, it will also slash how much money you actually put in your pocket.
Level 3 Debt Management: Intensive Care
Whilst Level 2 care will adequately clear-up run of the mill unpaid accounts, they will not squash more virulent debtors who remain resistant to these basic remedies. These parasites are toxic and they need to be ruthlessly resected out of your business. To this end as soon as the final demand deadline passes without the debtor settling the account you must instantly refer that debtor to a crack surgical debt recovery team.
Now like any doctor, while they may all have comparable qualifications, they don’t all possess comparable levels of skill. To this end, when selecting a debt collection agency to recover your accounts insist that they posses every one of these skills…
1. They routinely handle disputed debts. Most agencies either refuse to have anything to do with such debts OR they’ll charge you a small fortune to chase them. Insist on agencies that routinely treat disputed at no additional fee.
2. They guarantee collection of your account. Note: “No Collection = No Commission” is NOT a guarantee of collection. Instead it’s a worthless cop-out. Insist on guaranteed recovery where the collection agency actually shoulders the risk.
3. They provide a 30 day window where they don’t charge you or your debtor a cent of commission on money collected during this period. Important: never touch a collection agency that insists on charging commissions on collections from day one on all debts.
Bottom Line: If you want to recover the maximum amount of your overdue accounts quickly and affordably you simply must have all three levels of protection working seamlessly for you in your business.