What to do about debt

Managing the Debt Drain

Dealing with delinquent debtors is painful, particularly when you can’t afford to lose the customer.

The most obvious tactic is to stay on top of debtors: Ensure that your contracts and invoices have clear payment terms, and you have a procedure to follow through once a customer breaks these terms.  Importantly, ensure you keep a record of actions you take to recover debt.  This record will come into play if you have to use a more formal resolution mechanism.

Ultimately, some customers will not pay you even if your terms are clear and you have done everything in your power to recover the debt. Often small businesses just give up and don’t deal with the customer in question again.  Some of the other options available to you are:

1. Final letters of demand with the relevant court documents attached.  Legal document provider LawCentral has a clever product for this that takes you through the Letter of Demand to the appropriate court documentation.  Sometimes the letter will be enough to trigger action from the debtor to pay but you must have the intent of following through.  These kits are available for NSW, QLD, VIC and  WA.
2. Engage a debt recovery agency. Commission rates for debt collection services vary between 5% and 30% of the value of the debt.
3. Sell the debt for a small percentage of the owing value.

February and March are traditionally the worst cash flow months for small business – the Christmas rush is over, the Business Activity Statement is due and payments slow down with a dip in consumer spending. You might be OK but your customers could be under pressure and often whoever wields the most influence gets paid first.