At the end of June, with GDP down 7%, Australia posted its worst quarter on record and officially entered a recession for the first time in 29 years.
Triggered by the COVID-19 pandemic, the economic downturn will fuel a rise in bad debts, and some companies will be left with mounting accounts receivables.
However, chasing overdue accounts can be draining, both financially and emotionally. It can lower staff morale and even damage your brand reputation, if not carried out with professionalism.
So, for any companies that are trying to collect their debts at the moment, it’s important to think about your approach — and the real cost to your business in the long run.
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I spoke with Adam Stewart, the managing director of Debt Recoveries Australia, to learn how to approach debt recovery with kindness and empathy during a time when many people are struggling.
Be aware of financial hardship issues
“It’s definitely harder to collect the debts right now,” Stewart says, whose collection firm deals with commercial debts $5,000 and up.
“Because of the crisis, a lot of people and companies are not able to pay.”
For those experiencing genuine financial hardship, it’s important to be aware of the serious emotional stress this can cause. Something as simple as receiving a letter about an outstanding invoice can be extremely distressing.
For this reason, companies should be careful about the way they go about collecting their debts.
When an invoice is overdue, rather than sending another reminder email or an angry letter, a better approach is to be proactive, pick up the phone and take the opportunity to connect with your customer.
However, most people won’t do this because it’s too confronting for them.
“Yes, it’s an outstanding invoice that needs to be collected, but it’s also a really good excuse to ring them and say ‘hey, how are you going, and are you really able to pay this’,” Stewart says.
“If the financial controller or director doesn’t want to do it, get someone else on the team to do it. This is an opportunity to build rapport with your clients.”
Work with your debtors, not against them
Remember, collecting debts sends a strong message that you have good business practices and are serious about credit control. It demonstrates that you are organised and detailed, which most clients would respect.
“People always use the term ‘aggressive’ in debt collection but it really should be the opposite,” Stewart says, noting that debt collectors who are friendly, approachable and understanding tend to be far more successful.
“Particularly for debts at the lower end of the scale, as soon as we get threatening, it doesn’t work, because they can just put us to the bottom of the pile,” he says.
Likewise, Stewart says now is not the time to go down the legal route, partly because a court judgment is worthless when a debtor is in financial ruin.
Plus, during the months taken to prepare for a trial, any available funds will have probably gone to other creditors.
Instead, Stewart says companies should work with their debtors in a non-threatening way to find out what they can afford to pay.
If the client is asking to have the debt reduced or waived altogether, ask to see evidence of hardship, such as their latest sales figures or a profit and loss statement.
If they’ve been terminated from employment, ask for evidence of termination.
If a director says the company is going into administration, ask who the administrator is.
Most importantly, don’t let a lingering debt go for months and months.
The quicker you act, the better your chance of recovery before the company goes insolvent.
Do your due diligence
If you are taking on new clients during this time, don’t end up a creditor to a zombie company.
It’s more important than ever to thoroughly investigate who you’re doing business with.
“There must be thousands of zombie companies in Australia that are being propped up by JobKeeper,” Stewart says, adding that he suspects some of them may be trading insolvent, since the government removed the usual penalties.
The conditions for businesses to continue to apply for JobKeeper are now a lot more stringent, so those entities that are no longer eligible for the relief payment will likely go into administration soon.
“Some will have also reneged on their rent, so they’ll need to address that expense too,” Stewart warns.
“I reckon the wave of insolvencies will start around October and continue from there.”
Check their ABN to ensure the company is registered, if there have been any changes to the company structure, if any directors have recently been added, or if there’s an insolvency petition against that company — this is all publicly available information through ASIC.
“When new directors have been added, this tells me that they may be attempting to spread the risk of the company to another person or preparing to dissolve,” Stewart explains.
“Either way, it’s a flag to raise with the client,” he said, suggesting that the most proactive approach is to ask the client to update the director’s guarantee agreement to include the new director or directors.
You can also do a credit check on the company by ordering a report from a credit reporting bureau, such as Equifax or illion.
Beyond this, it’s also worth checking out their social media to get a feel for current public sentiment toward the company and its directors.
Don’t burn bridges
Another reason why people don’t want to issue proceedings through the courts at this time is because they want to protect their brand.
Particularly for companies that operate in small or close-knit industries, people will remember how those brands treated their clients, suppliers, partners, staff and other key stakeholders during times of hardship.
“Good or bad, people will remember how companies act during this crisis,” Stewart says.
“Doing something positive — people will remember that too.”
Keep in mind that even very good businesses can run into trouble during a recession as severe as this. If and when your client is able to recover from the current dip, they will respect you for managing your debt collection process respectfully and with integrity, and they will likely become a better customer for it.