PREVENTION IS BETTER THAN CURE
eCollect sees plenty of situations where bad debts could have been avoided. Here are a few tips which may help to improve the collection of our client's debts.
Identify the debtor correctly
It is crucial to correctly identify and name the legal entity which owes the monies. You must decide which legal entity made the agreement to buy goods/services or loan money from you.
This is especially true when if legal proceedings are issued. If you name the incorrect legal entity as the debtor, your legal proceedings may be struck out by the Court and may lead to you having to pay the legal costs of the party whom you've sued incorrectly.
The most common kind of legal entities are individuals, partnerships and companies.
See the eCollect Info Sheet on Identifying the Debtor.
Have a signed credit agreement / detailed quotation
eCollect understands that in the rush of day to day business life, there is not always the time to obtain properly signed credit documentation. Many business transactions are done without any paperwork at all.
However, it is not all that difficult to set up a basic credit agreement that clearly binds the client and incorporates properly drafted Terms and Conditions. See below.
Putting a few selected terms and conditions on the back of an invoice will normally not be binding on the debtor.
Having the terms and conditions on the back of or attached to a written quotation or specification of works is better.
The ideal business transaction documentation is:
- a written quotation or specification of works for each job;
- a signed credit agreement including a reference to the written quotations or job specifications and incorporating our clients Terms and Conditions;
- an invoice or invoices for the job or jobs.
Have a properly drafted terms and conditions
Each business should have a set of trading Terms and Conditions that have been tailored specifically for their business. eCollect can provide a basic set of Terms and Conditions in Microsoft word format for our clients to edit as they see fit. eCollect can also provide practical advice on how to best set up the Terms and Conditions for your business. See www.eCollect.com.au and go to the Credit Consultancy link.
Some important points that properly drafted Terms and Conditions should include are:
Costs of Recovery to be paid by Debtor
If the debt is owing by a partnership or firm of partners then each partner's full name must be stated:
e.g. JOHN PAUL DEBTOR & MARIA DEBTOR
(trading as JOHN & MARIA PURCHASES)
In the case of a partnership, each partner is liable for the debt, not just the partner who dealt with you. That means that each of the partners to the partnership must be entered into the data section of Pay Up!.
Multiple Defendants
The costs of recovery e.g. eCollect's commission is not generally recoverable from the debtor. A clause in the Terms and Conditions should allow such a charge to be legally recoverable. A clause to be considered in this respect is:
Costs of Recovery
The Customer shall pay the Supplier for all costs actually incurred by the Supplier in the recovery of any monies owed by the Customer to the Supplier under this Agreement including recovery agent costs, repossession costs, location search costs, process server costs and solicitor costs on a solicitor/client basis.
Without a specific written agreement including a clause similar to the above in place before the provision of the goods and / or services (i.e. not just on the invoice at the time of the provision of the goods and / or services), recovery of the cost of the debt recovery is not permitted. Where we are to seek recovery of both the debt and the costs of the debt recovery, eCollect will add this cost to the amount claimed. eCollect will add this amount to your existing invoices during the data transfer process.
Title not to Pass until Payment
Most people who supply goods are unaware that ownership of the goods changes with possession i.e. when our clients deliver goods to the debtor, the debtor becomes the owner of the goods. If the debtor does not pay, our client does not have the right to recover the goods. It is possible to change this arrangement by including a reservation of title clause in the Terms and Conditions.
Place of Contract
The Terms and Conditions should specify where the contract is made. This is especially important where our client and the debtor are in different states.
There are plenty of other points that properly drafted Terms and Conditions will resolve in our clients favour.
Nothing in the above should be construed as legal advice. Our clients should consult our associated legal firm E C Legal or any lawyer with an understanding of business law to obtain the necessary legal advice.
Consider obtaining personal guarantees or other security
A personal guarantee is an agreement in which an individual gives a promise that another person (either a company or an individual) will perform their obligations under an agreement. This is often used where the debtor is a company and the directors of the company will provide a personal guarantee to ensure payment by the company.
Other securities that can be sought are charges over real estate; charges over companies (known as debentures); assignment of debts; etc. Each of these requires specialised documentation which will require the assistance of a legal practitioner.
There is a natural resistance from our clients in seeking personal guarantees or other securities. Clients are sometimes embarrassed to ask for more than a simple promise to pay and debtors are reluctant to give them.
Nevertheless, where our clients are dealing with a difficult debtor or where a job is being taken on which involves additional risk to our client e.g. a large job where our client has to buy materials in advance, seeking additional security may be prudent.
Have a credit acceptance procedure in place
When a business gets bigger and staff are making contracts on behalf of the business, a detailed credit acceptance procedure should be in place and form part of the business's directions to its staff members.
The credit acceptance procedure could include:
- processes to ensure the correct identity of the debtor
- searches to check the directorship and shareholding of the debtor
- obtaining business or credit reports on the debtor
- a review of the risk of the transaction to our client
eCollect can provide a basic credit acceptance procedure in Microsoft word format for our clients to edit as they see fit. See www.eCollect.com.au and go to the Credit Consultancy link.
Obtain quality legal advice
The notes above have been prepared in consultation with our associated legal firm E C Legal. However, nothing in the above should be construed as legal advice. Our clients should consult E C Legal or any lawyer with an understanding of business law to obtain the necessary legal advice.
Do not delay in starting collection action
Finally, when a debtor does not pay, do not delay in starting legal action. Debts rarely get easier to collect and the general rule is the longer that a debt goes without collection action, the harder it will be to collect.
Ref: CLIENT INFO SHEET - prevention Techniques
Authorised by: James Woods
eCollect.com.au Pty. Ltd. Not to be reproduced without permission
Last Update: Thursday, 13 November 2008
