You know that payment you were really excited about getting? From the customer that promised you thousands of dollars in future orders? The customer that said they would pay within seven days, no problem at all?
But now you are angry. You don’t want them to order anything else. They haven’t paid and are now saying they can’t.
Does this sound familiar?
There is a huge misconception that when a customer doesn’t pay you it is entirely their fault. But getting paid on time and in full is up to you.
What if I told you every time you sell on terms, you are lending another business money.
Could you borrow money from any financial institution without a process and a contract?
Could you just promise them you would pay them ‘in seven days’ and you were good for it?
What if you offered three phone numbers of random people they also didn’t know, would that make it any better?
Well, it might sound silly, but that is exactly what you are doing.
At best, you are lending money without proper precautions. At worst, you are gambling with your business’ future. Either way, you can do better.
There are five major steps to the ideal credit process, to change from gambling to having a systemised business.
Knowing who you are about to do business with means a lot more than just knowing their name.
You need to confirm their ABN (usually using the ABR) to get their structure, whether they are active and registered for GST, as well as where they are based.
Manually, this step is twofold, as the data between ASIC and the ABR are not often synchronised.
In fact, when I have compared data sets in the past, there have been more than 26 thousand companies that are deregistered on ASIC but shown as active on the ABR.
This is another area that is really easy to get wrong. It is not enough to just have terms of trade, they have to be presented at the right time and agreed to in the right way.
Terms are only binding if they are agreed to, in writing, at the point of incurring the debt. If you have your terms of trade on your invoice, you don’t have any protection, as the debt is incurred when your customer agrees to your quote or takes on your service. This means, if you do quotes, you need to have your terms in front of your customer at that point.
Add to that the fact the law is an ever-evolving beast and you need to consider the relevance of your terms. If you haven’t had them checked in the last 12 months they are probably out of date.
3. Due diligence
There was a time when people’s word was their bond. That you could look someone in the eye, shake their hand and the deal was done. But those times are long gone.
That was followed by a now antiquated practice: trade references. Think about it, if you are going to have someone vouch for your performance as a bill payer, are you going to nominate someone you haven’t paid? Even the days of doing credit checks are passed, as this only gives you historic and almost invariably incomplete information.
A new approach is nearly here, and with the prolific adoption of cloud accounting, real-time visibility of a customer’s creditworthiness will soon be a reality.
4. Set credit terms
This is a step that gets missed all the time, often because it is a tedious process to send an email confirming what terms you have put your shiny new customer on.
But, it is necessary as it confirms the outcome of the credit process and helps to eliminate later argument over when you expect to get paid.
This is a big one. Unfortunately, even though the Personal Property Securities Register (PPSR) has been around since 2012, very few business owners are aware of its existence. Even fewer know what it can do for their business.
By using the PPSR, you can become a secured creditor. This means if your customer goes into liquidation you are protected from money being taken from you by “clawback” (voidable preference). It also means your business can have the same security priority as a bank can.
So if you are owed money when your customer goes into liquidation, you will be paid what you are owed before the liquidator.
This is contrary to what most people understand about liquidation. It doesn’t have to be a massive risk to your business anymore!