11 January 2016
The hangover from Christmas is a timely reminder for us all about the perils of debt - not just for consumers but for businesses too.
Each year, bad debt costs kiwi businesses hundreds of millions of dollars. Small and Medium sized Enterprises (SMEs) particularly feel the pinch, as there is often less liquidity and a tighter cash flow than larger corporates.
Lyn Egan is the Tauranga-based Baycorp NZ Business Manager and shares some of her best practice 'to do's' on how to stave off bad debtors.
Ms Egan says SMEs should start with a credit check, to find out as much as you can in advance about new customers or creditors. Baycorp credit checks start from $4.95(exclusive GST) and can take the guesswork out of a customer’s payment history.
“It is always a good idea to run credit checks on new and existing customers. Build a profile – get to know a potential customer before doing business.”
“A common mistake we see is that people don’t check the correct legal entity of a business – get as much information as you can about a prospective customer so you can build a robust profile.”
Tauranga-based Altex Coating Limited, which specialises in protective coatings, linings and fireproofing, uses Baycorp’s credit reporting service (CRS) to get quality information on new customers wanting to establish an
Altex credit controller, Lesley Park says this service has been invaluable in allowing her to obtain credit information about the customer, including their company and ownership details, before they are approved.
“We can then follow up any discrepancies in the information they give us and what the credit reporting service provides.”
Ms Egan says another top tip is to be punctual with invoicing, as customers are more likely to pay when invoices are issued accurately and on time.
“Chase up late payments by sending customers timely reminders regarding payment terms. This can easily be done through email, a phone call or by post.”
Ms Egan says it’s important to ensure the business has a credit policy for all customers that is understood and adhered to by staff.
“Ensure that there are processes in place to regularly check your credit policy to ensure that it is up to date and reflects your business’ risk profile.”
“If all else fails, make sure you speak to a debt resolution agency sooner rather than later – businesses will have a much better chance of recovering outstanding debts if they take action quickly.”
BAYCORP TOP TIPS TO AVOID DEBT:
Terms of Trade
Make sure you have clear Terms of Trade which are communicated at the start of the business relationship, available on your website and/or distributed with your invoices. Ensure your terms allow for the recovery of collection costs which means that any debt resolution charges can be passed on to the customer. We also recommend you allow for a personal guarantee when you are dealing with a limited liability company.
Start with a credit-check
Nobody wants to be in a position where they have bad debt(ors) so we suggest finding out as much as you can in advance about new creditors. Build a profile – get to know a potential customer before doing business. A common
mistake we see is that people don’t check the correct legal entity of a business – make sure to get as much information as you can about a prospective creditor so you can build a robust profile.
And if you haven’t it could be a good idea to also run credit checks on existing customers in particular, the ones with which the financial exposure to your business is high.
Identify appropriate terms of trade
A simple credit check can protect your business from potentially harmful debt and can assist you to set up terms of trade with clients to mitigate bad debt. It is crucial to match terms of trade to your creditors financial health.
Invoice on time
Invoice customers as soon as practically possible. Customers are more likely to pay when invoices are issued accurately and punctually.
Chase up late payments
Send customers timely reminders regarding payment terms. In today’s age this can be done through email, calling or snail mail. The more overdue payments are the harder it becomes to recoup costs.
Have a documented credit policy
Ensure you have a credit policy that is understood and abided by all staff. It is important that the same rules are applied to all customers. Ensure that there are processes in place to regularly check your credit policy to ensure that it is up to date and reflects your business’ risk profile.
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