If you’ve ever encountered non-paying customers, you’re not alone. It’s an unfortunate reality of dealing with clients on credit terms – some of them, when the work is done or the product is delivered, refuse to pay. They become the dreaded defaulters, the fly-by-nighters, causing you to waste time, resources, and cash.
Most businesses have at least one horror story about a client who consumed valuable resources before evading their debt. Sometimes, they claim they can’t settle; other times, they simply disappear.
When facing this challenge, it’s crucial to remember why you offer credit terms in the first place. It’s a part of your service, setting you apart from competitors who don’t extend such courtesies. In essence, you are effectively lending to your customers when you work without upfront payment.
With this in mind, let’s explore how to deal with customers that won’t pay.
1. Avoid them by tightening payment terms
The most effective way to deal with non-payers is to avoid them in the first place. Unfortunately, they don’t always reveal themselves upfront. While asking new customers for trade references is common practice, it’s flawed because customers are unlikely to provide references for companies they haven’t paid. Instead, it’s essential to investigate the credit record of the customer.
Online tools are available through credit reporting bureaus that allow you to see the payment behaviour of your customers beyond their contact with you. If a customer is paying its other suppliers late as well, it might be time to take action to end the relationship or move to stricter terms such as cash-on-delivery (COD).
2. Implement proper policies and procedures
If you were a bank lending money, you’d have procedures in place to assess customers and chase their debts. In business, it should be no different:
- Develop written policies governing when credit can be extended, the terms, and the steps for pursuing overdue payments. And stick to them.
- Require new customers to complete an account application form detailing your credit terms and policies, setting clear expectations.
- Send reminders at 30 days and 45 days, or as appropriate for your industry.
- Set a limit, such as 90 days overdue, for taking further action.
- Draft a final notice informing the customer that their debt must be paid immediately to avoid legal action and the registration of a default.
Having established procedures helps educate your clients about your practices and demonstrates your commitment to credit management. Additionally, businesses that don’t follow up often get paid last, so having credit measures in place can expedite payment.
3. Chase the Debt
In payment collection, the adage holds true: the squeaky wheel gets the grease. Your business should actively pursue overdue debts, whether through letters, emails or phone calls.
When a customer won’t pay, try to understand why. Are they facing cash flow problems, or are they on the brink of collapse? If they cite cash flow issues, propose a payment plan. Ensure that any agreement specifies a precise payment schedule and includes penalties for missed payments, such as immediate legal action and the registration of a default.
Customers often claim that the delivered products or services didn’t meet their expectations. While this can sometimes be a ploy, address any raised issues in good faith. You might need to offer compensation or a discount, ensuring your business recovers at least something.
4. Report a Default
If a business refuses to pay after 90 days, consider reporting the default to credit reporting bureaus. The threat of such action can often compel a customer to pay. Payment defaults registered with CreditorWatch appear on the credit report for that particular company.
5. Consider a Debt Collector
Debt collectors, though not endowed with additional legal powers, are experienced in chasing recalcitrant debtors. They typically work for a percentage of the recovered debt. If your business lacks the in-house staff to chase debts effectively, outsourcing to a debt collector could be a practical solution. However, be cautious, as overzealous collectors can damage customer relations.
6. Take legal action
When all else fails, legal action may be the last resort. Unfortunately, this is neither quick nor inexpensive. It can take 18 months or more for the legal process to conclude, and legal costs can consume a significant portion of any recovered funds.
Most Australian jurisdictions have small claims courts or tribunals attached to the magistrates’ court for lodging claims. While it’s cheaper to pursue claims in such forums, their actions are not usually enforceable. Local and magistrates’ courts provide enforceable judgments, but their rulings aren’t automatically enforced. You’ll need to request action from the sheriff’s office, which may encounter challenges when identifying seizable assets.
In many cases, unless the debt is substantial and you’re confident the debtor can pay, legal action may prove more trouble than it’s worth. In any event, consulting a lawyer is advisable.
One advantage of legal proceedings is that they can often lead to mediation and negotiation. If you don’t recover the debt, you can usually ‘write it off,’ depending on your tax situation.
Tips for Dealing with Bad Debtors:
- Conduct credit checks on new customers.
- Require customers to complete credit application forms.
- Establish processes for actively chasing debts and sending reminders.
- Specify consequences for missed payments. Report defaults to registries like CreditorWatch.
- Consider outsourcing to a debt collector if self-chasing isn’t effective.
- Contemplate legal action only if it’s likely to succeed.
CreditorWatch provides a comprehensive suite of cost-effective solutions to assist your business in conducting vital due diligence at every stage of the customer relationship, all with the aim of safeguarding both your business and cash flow.
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