Key considerations for controlling business debtors2 May 2022
While growing your business it can become easy to lose sight of effectively managing your debtors. However by doing so, you can help your business continue to grow successfully.
The information below can help make the task of controlling business debtors much easier.
Have terms of trade in place before extending credit and know who is behind the customer
Make sure you put all terms of trade in writing. It’s surprising how many businesses still supply goods and services by informal arrangements. Having terms of trade in writing is an effective way of minimising and preventing bad debts arising.
Another important factor is to complete thorough credit history and business reference checks before offering credit to new potential customers. Be upfront on your terms of trade and credit limits and put these in writing. Ensure the new customer signs acceptance of your terms of trade.
Know who owes the money – do an ASIC search
It is vital to perform background checks on potential customers before commencing a business relationship with them.
The only way to know whether a business you want to deal with is in administration, liquidation or deregistered is to check the ASIC Registers. This is an easy and quick way for weeding out any customers that do not have the ability to pay you.
Know the rules about serving letters of demand / statutory demands – time limits, thresholds, and service requirements
We recommend you have a letter of demand template your business can use should the need arise. A letter of demand should include:
- accurate information;
- a stated intention to commence legal proceedings if you are not paid by a specified time;
- attached copies of any relevant supporting documentation.
The letter of demand should be signed and a copy should be kept for your records. We can assist in drafting a letter of demand template customised to your business.
You should also be familiar with Section 459E of the Corporations Act 2001 (Cth). This section deals with statutory demands. A statutory demand is a written request for payment of debts owed by an insolvent company. The debt owed must be at least $4,000.
A statutory demand requires a debtor to do one of the following:
- pay the debt they owe you;
- secure or compound for the debt; or
- make an application to set aside the statutory demand.
The statutory demand must be drafted in the prescribed form.
The debtor company has strictly 21 days to comply with the statutory demand, otherwise a legal presumption will be raised that the company is insolvent. Once this occurs, you can apply to the Federal or Supreme Court for an order that the debtor company be wound up in insolvency.
You must also satisfy the service requirements of a statutory demand which may be done by leaving the statutory demand at or posting it to the company’s registered office. You can also deliver a copy of the statutory demand personally to a company director. It is critical that service of the statutory demand is done correctly, and that service is evidenced in an Affidavit of Service.
It is important to ensure that the requirements for the statutory demand are strictly followed, otherwise the demand may be set aside.
Educate your credit control team
It is vital that all staff in the credit control team are on the same page when it comes to your business’s credit control policy and procedures. We recommend you have regular meetings to go through credit control policies and what changes need to be made, if any.
It is important to ensure that all staff understand the terms of trade. Taking some time out to ensure all staff clearly understand the terms of trade can prevent unnecessary debt chasing down the track.
Keep notes of phone calls, etc. when chasing money
If you find yourself chasing money from a debtor, it is critical to keep a record of phone calls, emails, letters of demand and other documentation supporting your claim. It will also make it easier to keep track of your dispute.
The key to controlling business debtors is prevention. Having clearly written terms of trade and knowing who your debtor is and their credit history, minimises the risk of you having to chase them for payment in the future.
Training and educating your credit control staff is also vital to ensure they are on board with the business’s trading procedures and policies and are effective in carrying out these procedures and policies.
If you or someone you know wants more information or needs help or advice, please contact Ian Tait on 08 9422 8111 or email email@example.com.