Cash-flow issues are the top reason Australian businesses fail, according to ASIC. You can have the best business in the world – a great product or service, booming orders, happy customers – but if the cash isn’t coming through, it can all go up in smoke. Safeguarding your business from bad debts can help keep cash flowing and relieves the headache of chasing your customers. Here are five steps to avoid bad debts and keep on top of unpaid invoices.
Every new customer should fill out a credit application form. This will include their full business details, trading name and ABN, how long they’ve been in business and any credit guarantors. You can also ask for bank references and details of suppliers – you should then contact these as referees. You can also ask the customer to sign a director guarantee. Make sure you verify the customer’s business registration on the Australian Business Register.
Step Two: Conduct Credit Checks
You should carry out a credit check for every new customer you want to extend credit to. There are several agencies that offer credit assessments, such as Veda. The cost depends on how much information you need. You can also supplement this with your own research, such as searching for online reviews of the customer.
Step Three: Set up Clear Credit Terms
Thirty-day terms are standard for most businesses, but you can set whatever terms you like. Ensure that your terms are clear, in writing and understood by both parties. You should also set a credit limit, as well as late-payment interest. You can review these terms as you go. An old, valued customer can be given more flexibility than a new, unknown customer.
Step Four: Invoice Properly
It’s vital that your own invoicing is clear and correct, and doesn’t provide any opportunity for the customer to delay, for example by omitting your bank details or entering the wrong amount. Up to 60 per cent of invoices in Australia are paid late, beyond the standard 30-day period. Invoice promptly and follow up with reminders to help your customers along.
Step Five: Debt Recovery
A delayed payment or partial payment may be better than no payment at all, and it may save you the expense of legal action. Send a letter of demand and offer payment via instalments as an option. If that fails, you can hire a debt collector or start legal action, but the costs of this should be weighed against the chances of recovery. It is smart to seek professional legal advice in such circumstances.
There are some alternatives to providing credit, such as cash on delivery, collecting a deposit or progress payments, as well as lay-by. Don’t forget to keep your own records of problem payers, and consider reducing their payment period. You can also cancel a credit agreement at any time.