How to avoid problems – cheaply

First, check them out

IT IS ridiculous for anyone smart enough to be in business not to make routine credit checks. There is no point chasing a debtor with a summons if there’s nothing there. You’ll get plenty of ‘legal action’ — but you’ll pay for it all yourself. The debtor won’t be touched.

Look under ‘Credit Reporting Services’ in the Yellow Pages. Call a couple of these services. Get their literature. Then join one. You pay an annual subscription (in the very low hundreds) and a small fee each time you want to find out about someone (whether a person, or a business). And I do mean a small fee: less than $30, usually.

On an individual, you can get information like this:*

• Driving license number and date of birth.
• Name of employer, and previous employer.
• His address, address before that, and before that.
• Companies he is a director of, and former companies.
• Credit services, banks etc. that have been enquiring about him, and when.
• Any writs and summonses served, and whether he has had any court judgments against him.
• Default information, including written-off accounts and accounts referred to a collection agency.
• Which mercantile agents have made enquiries about the person.

On a company, you can get information like this:

• Trading address and registered office.
• Incorporation details, issued shares and paid capital.
• Details of directors.
• Writs and summonses served and outstanding court judgments.
• Default information, including written-off accounts and accounts referred to a collection agency.
• Which mercantile agents have made enquiries about the company.

So if someone who asks you for credit is in financial trouble, you’ll know it before you start doing business. You can tell him: sure, send us the $6200 and you can have the (whatever it is). If he huffs and storms and threatens to take his business elsewhere, let him. Let one of your competitors have the loss.

Now I realise it’s easy to say, “Keep your credit tight”. I know the temptations. The sales staff are selling, selling. Maybe business isn’t too good, and you really want this sale. But I repeat: the easy way to get difficult debtors to pay is never give them credit to start with. Money up front, or no sale.

But even if your credit checks are squeaky tight, you still won’t avoid all problems. A debtor can ‘go bad’ for a hundred reasons. He can be a first-rate customer for years, then something slips. Instead of paying in 30 days, all of a sudden he drifts out to 45 or 60. Or maybe a cheque will bounce. Or something else that’s not just quite normal. This should start to ring little bells. You should find out what the problem is. Use your credit reference agency. If that doesn’t show any ominous signs, then phone the customer. You’re entitled to find out what’s happening — you’re providing the customer with credit.

The customer might say, “Accept things as they are, or we’ll go somewhere else.” That can put you in a quandary. Maybe he’s spending $10,000 a month and it’s an account you don’t want to lose. But really, you might go for three months without getting paid. Maybe $30,000. And if he doesn’t pay in the end, it means you might have to find $300,000 in new sales to make it up.

Another suggestion: treat your sales and credit people as equals. Pay them the same, push them the same. Invite your credit manager to some of your sales meetings. If your credit manager has guts, he might say something like, “You bastards out there make the sales, but I can’t get the money. Don’t you eyeball them? Look, so and so is paying on 90 days now. Is he earning a quid? Or is he slow as hell out there, with no contracts? Is there lots of stock around? Let me know. You might try picking up a cheque too, next time you’re there.”

Then get it in writing

THE MORE you get in writing, the stronger your hand will be if the debtor goes bad. If you have to go to court, your case will be tight. (But usually, with lots of signed documents in your hands, you probably won’t need to: the debtor will realise his position is too weak.)

I know this isn’t a popular topic. All that paperwork hassle — for what? It feels like driving with the brake on. But I wouldn’t be doing you a favour if I didn’t at least mention ‘credit management’ (the right term for a system for checking out your customers, and keeping all the documentation straight).

How much documentation you use — and what sort — depends on the size of your business, how much bad experience you’ve had with debtors, how much you know about credit management, how tolerant your customers are about signing papers (including directors guarantees), and a hundred other things. But whether you know it or not, you already have a credit management system: it might be good, or less good, or downright lousy — but it’s there.

You may be relieved to know that I’m not going to mention anything else about this topic. (As I said, I’ve found that people really don’t like to hear about it.) But that doesn’t let you off. If you get your credit management wrong, it will come back and thump you. If you get it right, you’ll get your money almost every time. But to get it right, you may need help: if you feel shaky on all this, you can contact us here at DebtForce Limited to assist.

Does your credit application and terms of trade work when it has to?

In times like these, every business dollar has to count and the loss of any cash out the back door by way unpaid accounts places needless pressure on the business cash flow. The provision of credit remains the foundation of the `Money Go Round’ for New Zealand businesses, enabling one entity to do business with another while providing goods and services on a basis of trust,  but those goods and services must still be paid for within an agreed time frame if the business is to survive. 

In a perfect world it’s a great arrangement – that is, until the unscrupulous take advantage and break the rules forcing the business to protect its income by minimising its exposure. To protect itself, a business must actively take steps to mitigate loss or potential future losses caused by customers who do not pay on time or in some instances not at all.

In my capacity as Managing Director of DebtForce Limited, I see a great many companies spending thousands of dollars on loss prevention methods at the front of their business but fail to see what is slipping out the back door when the credit application and terms of trade are ignored. 

Indeed, It never ceases to amaze me how overlooked the importance of the Credit Application is and how businesses are all too often prepared to spend more on other documentation instead. As a result, businesses are often left open to exploitation due to deficiencies in the document, or when there is no document at all.

There are a number of professional debtors who are experts at exploiting the weaknesses of a company’s credit agreements and its credit approval processes which often allow the debtor to walk away from overdue accounts. Unfortunately, in such cases, the law does not view such matters in the same light as shop theft, for instance, though in my opinion, it is much the same.

A credible credit application and terms of trade document should always be the critical starting point to covering that back door risk and a well designed document can afford good protection and suitable remedies when required when managed correctly. The receiving of the signed credit application is only the first step in the credit approval process, before the formal information vetting of the application can commence.

So without a doubt, the credit application is absolutely necessary and becomes an insurance document, legally binding both parties once it has been signed by an applicant and accepted by the company. If future court proceedings are issued to recover overdue monies, this document will play a significant part in those proceedings so it needs to be right.

Design and content of a credit application and terms of trade document should not be under estimated. It should reflect and accurately record the company’s credit policy, operation, and terms of credit provision.

The application needs to indicate immediately to any potential customer that the business is just as serious about enforcing its trading terms and conditions, including the collection of overdue accounts, as it is in selling its products or services.

There are many government acts, administered by the Ministry of Consumer Affairs, that must be complied with when providing products or services, and these should be part of any credit application. However, these compliance rules can vary considerably depending whether the goods or services provided are for ordinary consumer use or are strictly for commercial purposes. 

Whatever the end use is likely to be, the finished document needs to clearly define what rights or remedies the customer may have under those appropriate circumstances. It must also establish the rights of the business and the rules under which they are prepared to extend credit and expect payment, as well as the action that can be taken should the customer default on payment. The application and terms and conditions need to be clear, concise and understood by all concerned.

The success of any business can depend on this document and no customer should have a credit account established without signing a credit application and the appropriate credit checks having been conducted. Having an unsigned application is like having no application at all as you may have default of payment remedies in the application but they are toothless if the application is not signed.

When trying to recover debts for businesses, DebtForce personnel see many credit applications that contain a lot of information provided by debtors that is absolutely pointless in that it can never be used to recover the debt because it is subject to the Privacy Act or client confidentiality restrictions.

Ensure the questions on your credit application form bear some relevance to the information you need to both fully qualify the entity applying for credit and for obtaining information that could help locate a defaulting customer should it become necessary later. For instance, an applicant’s date of birth is of more importance than the name of his accountant and bank manager.

Initially, the objective is to clearly identify the legal entity of the proposed customer as this will determine the type of information that is needed. An individual applying for credit has a different range of information requirement to that of a company, meaning what may be relevant for one entity does not apply to the other, and the laws of civil enforcement vary accordingly. 

There are many other types of entities such as Trusts, Incorporated Societies, and Marae’s where it is often hard to identify just who the legal applicant may be. In these cases, credit applications should only be approved by someone who understands these entity structures.

The actual terms of trade for the business providing credit can be simple if the operation of the business and the products and services offered are relatively straightforward. But where the product offered is of high value or the services varied, then the business needs to account for any eventuality in its terms of trade.

This is important but, at the same time, the credit application form must remain easy to complete and its terms and conditions readily understood. Don’t be tempted to copy another company’s application as it is unlikely to completely fit your situation and so there is a chance it may not be enforceable when needed.

It is recommended that the format of every credit application be reviewed at least every five years to ensure it is kept up to date with current legislation. The process should also include a revision of the current customer information held to ensure the original applicant remains the same company initially approved. 

 

If an account application is not renewed at the time a customer’s business changes hands, a messy situation can arise whereby the new owner may not be responsible for the account still held in the name of the former business. With neither the former business existing any longer and the new owner not having signed a new account application, the recovery credit monies can be difficult if the customer defaults.

When it does come time for reviewing or preparing an application, use professional organisations such as reputable debt collection companies that provide the service or solicitors that have civil litigation experience. They have a great deal of knowledge of what works and what doesn’t, as well as experience of the court process and outcomes based on the experiences of their own clients. 

There are many clauses that can be included into terms of trade and the preparation of these is a very specialised area where mistakes or exclusions can be very expensive. The inclusion of clauses that stipulate that the defaulting account holder pays all the costs of recovery including legal fees, can save a company thousands of dollars and enables them to be more aggressive in recovering overdue accounts.

The inclusion of clauses that enable the business to conduct enquiries as to the credit worthiness and integrity of a potential account holder is also important as unless such enquiries are undertaken, the credit application is of little use. 

However, while it is prudent for permission to be obtained for those enquiries to include officers of a company making the application as well as the company itself, be very wary of such clauses as any authorisation given by the signatory of the account application to access to another’s personal information as it does not conform with the requirements of the Privacy Act.

It is also prudent to have additional security built into the application by way of personal guarantees or by securing the goods themselves through the Personal Properties Security Register (PPSR).  Both of these need to be considered carefully for if they are not documented correctly, they will have no legal standing when needed.

The personal guarantee, when included in the account application, must be distinctly separate to the application so there is no confusion as to what the guarantor is signing. Segmentation of the guarantee provision is not the only essential matter for a binding guarantee. There also needs to be terms and conditions within the guarantee relating to payment defaults, and the remedies for recovery against the guarantor which must also be set out within the guarantee itself. 

This is crucial since each entity bound by the document, must clearly sign to those terms with the company being bound in the credit application itself and the guarantor separately bound by his or her guarantee.

Protective measures implemented under the Personal Property Securities Register (PPSR) should ensure all goods supplied to the customer be registered by way of a financing statement that primarily authorises the ‘giving of security’ over those goods by the customer applying for credit. But it is important that the requisite clauses are contained in the agreement at the time the customer signs it and not some time later. 

Secured goods can then be reclaimed by the creditor in the event of default or the security can be renewed as circumstances change. Although this registration process does not guarantee your goods will be paid for, it does provide a creditor with a greater degree of comfort and security than would otherwise exist. 

In summary, the credit application performs many functions and, when prepared correctly, can provide the business owner with some confidence that any potential losses out the back door are minimised. 

For more information about assessing your credit policies and documents or to recover overdue accounts, contact DebtForce Limited at 0800-332 836 or email enquiries@debtforce.co.nz or visit www.debtforce.co.nz 

By Steve Huggard

Personal Guarantees

“My solicitor said not to sign it”.

Many credit applications and agreements have an option for a personal guarantee. Unfortunately sometimes requiring a personal guarantee can result in some conflict with a potentially good customer particularly if they have spoken with a solicitor about this.

As a Credit Manager other questions in relation to the guarantee will now arise.

• What is the policy of the company in relation to guarantee requirements?
• Do I need the guarantee?
• How much pressure can I place on the potential customer to sign it?

These simple questions could be answered many different ways by different companies. It really comes down to you and having clear direction through the company policy. Unfortunately when a Solicitor becomes involved in advising his client the obvious thing for him to say is “don’t sign it”.

This causes a problem for both parties as one wants the goods and wants to do business while the other party is charged with protecting their business and enforcing the company’s credit policy in regard to this issue.

The result is that both parties may not be able to agree due to the advise given by the solicitor who is not financially effected by any decision he or she makes for their client.

I am sure that the in most instances the Solicitor would not finance the business for the client yet he is advising his client on what basis goods should be obtained from suppliers. If the guarantee is not signed the applicant’s business could suffer considerably by not having the raw materials it needs while trying to negotiate the opening of those credit facilities.

It never ceases to amaze us how many intelligent business people make the statement “my solicitor said not to sign” and then either pay more for product or not have it at all. Don’t forget the solicitor gets paid for his advise. Ironic isn’t it when they have no financial interest. Perhaps the Solicitor may come forward and sign it for his customer, I don’t think so.

If the credit — applicant is confident of their business being able to pay its debts as they fall due signing a guarantee should not be a problem. After all who owns and developed the business to start with, certainly not the solicitor. Recovery on a personal guarantee is generally the last resort in trying to resolve an outstanding account.