In 2015 we were approached by an earthmoving company that had done some work for a builder. The total value of the work done was just under $6,500.
This debt was going to be difficult to collect right from the start as the earthmover:
- didn’t do any credit reference checks on the builder
- only gave a verbal quote for the job
- didn’t have the builder sign a contract backed with terms and conditions that had been vetted by a lawyer
- didn’t have the builder sign a Director’s guarantee saying he would honour the debt if the business defaulted on the loan
- didn’t have the builder sign anything to say the work had been completed and was satisfied with the work
- waited till the debt was 3 months overdue before referring it to us for collection
These pretty much represent the most common mistakes made by businesses providing credit to others. As it turns out, this particular builder was known to us due to past dealings with other clients. We did manage to collect $1500 of the due debt but, because of the lack of paperwork, there was little the builder could do in the way of legal action to recover the money due.
Key lessons from this experience that all business owners should heed:
- Don’t provide credit to customers without doing due diligence and background checks to ensure they are creditworthy
- Make sure you have a robust (i.e. lawyer reviewed) Contract, Terms and Conditions, and Director’s Guarantee in place and that the
customer agrees and signs these before any work is done or services provided
- Provide a written quote for a job and have the client sign and agree to that quote before the work begins
- Have the client sign off when the job is completed
- Follow up as soon as the debt falls overdue and never go beyond 45 days before calling in professional debt recovery experts
If you have a customer who is unwilling or unable to meet your conditions, then simply have them pay cash when the work is done (if not before). Unless finance is your core business, you shouldn’t put your business at risk by providing credit to those who may not be able to honour their end of the deal.
We have recently set up a specialist Credit Risk Control division that helps clients set up systems and reduce the risk or impact of debtor failure. To see whether your business is at risk from such issues, we invite you to make use of our new free Credit Risk Assessment tool. It only takes two minutes and gives you a clear indication of your level of risk and steps you can take to reduce this. Pretty good investment of two minutes of your time don’t you think?