The 7 Deadly Debtor Management Sins


Last week I had an interesting talk with Nick Kerr from EC Credit Control who told me that commercial defaults increased 43% in the February quarter. Shockingly this also increased 34% in the May quarter.

In simple terms this means that there was a large increase in businesses failing to pay their debts. Are these businesses your customers?

Nick and I decided to put together this blog packed with templates and tips. By avoiding the ‘7 deadly debtor management sins’ you will reduce your exposure to bad debtors and also make it easier to get them to pay should something go wrong.

So here we go –  the 7 deadly debtor management sins according to the Nick the debt collection pro

1. No clearly defined terms and conditions disclosed

It has been common for businesses to do business on a simple handshake. As consumers have become wiser, and maybe a little more cunning, business owners now face many uphill struggles.

Whether it is getting paid on time, jobs being cancelled at the last minute, defects being noted some 12 or 24 months after the work was completed, or being able to pass collection costs on to the customer for late payment, nothing is ever as easy as it first appears.

Without terms of trade in place you could be heading for disaster.

2. No formal credit policy

One of the biggest failings in business is that after the job is completed there is no follow up for payment, and before you know it, the invoice can be three months overdue.

By having a clear credit policy from the start of the relationship with your customer a lot of potential problems can be erased.

There is no point doing the job if you don’t get paid for it because you haven’t bothered following up the payment. It can be as simple as sending an invoice, then a statement followed by a reminder phone call. If they still haven’t paid, don’t be afraid to escalate.

Here is an example Debtors Collection System

Letter Templates

Here are some letter templates that may assist you in following up your outstanding debtors:

1.            First Debtors Letter – Template

2.            Second Debtors Letter – Template

3.            Final Payment Demand -Template

3. Provide credit when you state you are a cash business

A cash business is exactly that – your customer pays cash as soon as the job is completed. If you allow the customer to pay in seven days then you provide credit, which means you need to have a credit policy in place.

4. Having a credit policy but never using it

If you have a credit policy, then use it. If you aren’t the right person to be implementing it then find someone who enjoys doing these duties. You will be surprised at how quickly your cash flow improves when you follow a structured approach.

5. Procrastination when dealing with slow payers

Too often we hear clients say, “I will just give them one last chance” when the debt is 6-12 months old. How many chances do you need to give your customers?

What communication have you had with your customer over the past 6-12 months?

If you are not talking to your customer then what chance do you have of collecting the money?

Next to none I would suggest. If your customer has not paid you then don’t be afraid to escalate it to the experts i.e. EC Credit Control!

 6. You believe everything the customer tells you

Nick could write a book on every line or excuse he has been told when it comes to asking for payment; the book would be an extremely large novel. If someone says they will pay you, then get a date from them and the amount they will be paying as this establishes a commitment. Make sure you diary this date so you can follow up if payment is not received.

7. Reliance on trade references rather than an independent robust credit checking

So many times a business will phone the trade references written down on the credit application form and funnily enough receive a glowing reference. Well of course you will, as the customer is not going to put down someone who will offer a negative experience, are they!

Unless you can control who they write down as a referee, relying on trade references can be very dangerous.

To ensure you receive a robust and independent picture on your new customer, EC Credit Control can provide you with the ability to gather information through a credit bureau. But just remember that to enable you to complete such reports you will need to have your terms of trade in place and up to date to ensure you comply with current privacy requirements.

Just remember that some people set out with the intention to never pay you!

Sounds simple? Well it is.

We are here to guide and support you and most of all to add value to your business and lifestyle.

If you need help please give us a call. Our goal here at Legacy is to partner with you and other industry experts to provide you the best solutions.

This post is by Jason Lougher from Legacy and Nick Kerr from EC Credit Control (NZ) Limited.