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Debt recovery and the realities associated

By Andrew Kingstone - Updated on December 15, 2021

If you’ve ever had to recover an overdue invoice from a difficult customer, you’ll know that the process is seldom straightforward.

With the number of difficult conversations that eventuate, the significant impact recovery can have on your cash flow, and not to mention long term customer relationships, there are challenges when it comes to debt recovery.

With New Zealand just moving to the traffic light system and our largest city recovering from a long period of lockdown, we have endured the harsh realities of recovering overdue debt in these times and have devised some ways to overcome this. We share some of these in today’s blog.

Reality No. 1: Debt recovery is not easy

In an ideal world, you provide a product or a service and then the customer pays. There would be no need for a credit control function at all. But unfortunately, this isn’t always the case, and the process of recovering overdue invoices can be a tiresome and very costly process.

What can you do to assist collections:

  1. Act quickly

The sooner you contact your customer after their invoice becomes overdue, the more likely you are to collect the payment in full.

Some businesses will naturally give their customer the benefit of the doubt, and wait a few days before contacting them. But there are a number of reasons to contact them straight away. They may have forgotten to pay, misplaced your invoice or even not received it in the first place.

And if they are deliberately not paying, perhaps due to financial pressure, it’s even more important to remind them immediately – thereby demonstrating you’re hot on credit control and don’t tolerate late payment.

So, send an email reminder that the invoice is overdue as soon as you can. Then, adapt your subsequent communication according to the response received (or not received).

  1. Know exactly when each invoice becomes overdue

To be able to act quickly, it is vital you know exactly when an invoice is going to become overdue.

You can achieve this by regularly reviewing your accounts receivable ledger to ensure that your customers’ payment activity is always observed and any upcoming payments or overdue invoices are noted accordingly.

This will allow you to be efficient and punctual with your debt recovery activity so that any delays are limited and the impact on your cash flow is reduced.

  1. Keep adequate and detailed records

You should always keep a record of all invoices, letters, emails and phone calls with customers. This information acts as evidence that will support your debt recovery efforts should you need to instruct a debt recovery agency or take legal action.

With regards to paperwork, business terms and conditions can also be a great tool for protecting your business. By clearly stating what you expect from the debtor and what they can expect from you from the outset of your relationship, you are setting expectations that could help to limit disputes and avoid any potential surprises in the future.

Ensure these are signed by the customer before the point of sale, confirming their acceptance of your terms.

Reality No. 2: Customers don’t always tell the truth – sometimes stretching the facts!

Collecting overdue invoices would be much simpler if all customers told the truth. But, alas some customers will do anything they can to stall or avoid making a payment.

What can you do?

  1. Be sceptical

When a customer gives you an excuse for late payment it can be challenging to know if they are being genuine or not. Being able to identify false excuses can speed up the debt recovery process.

  1. Offer a selection of payment methods

You can give your customers fewer excuses not to pay by making it easier for them to pay you. Offering a selection of payment methods is a good way to do this. Given the speed of online banking, direct debit and credit cards are often the preferred method of payment.

Whichever options you choose to accept, make sure that your invoices include the information customers will need to make a payment – they don’t want to have to look for it.

  1. Always follow through on warnings

If your customers think that they can get away with paying late they may continue to delay payments to preserve their own cash flow.

Demonstrate a persistent and professional debt recovery approach and always follow through on warnings such as charging interest, referring to an external agency or taking legal action.

This encourages them to pay what they owe, but it will also make them think twice about doing it again in the future.

Reality No. 3: Getting tough is sometimes necessary to get paid

Some customers will avoid making payments for as long as they think they can get away with it. In these circumstances, stronger tactics can be used to encourage them to quickly settle outstanding invoices.

What can you do?

  1. Place the customer on a stop list

When a customer consistently misses invoice due dates they should be put on a stop list and all services withheld until payment has been received.

This not only demonstrates that you don’t tolerate late payment, but it also protects your cash flow from further damage.

  1. Charge late payment interest

Under the Late Payment of Commercial Debts (Interest) Act, businesses have the right to charge their customers compensation and statutory interest on any overdue invoices to help cover debt recovery costs.

Sometimes simply informing your customers that you charge late payment interest can be enough to encourage them to settle the invoice as soon as possible, and it’s up to you whether you then choose to enforce it.

  1. Bring in additional help

When chasing overdue invoices, there can be a fine line between dedicating time to recover payment and this being counter-productive.

It’s important to be able to recognise when your internal efforts aren’t working or are consuming too much time. In these instances, instructing an external debt recovery agency could be more beneficial.

With extensive experience in collecting payments from businesses of all shapes and sizes, a specialist commercial debt recovery agency will use the right blend of understanding, sector knowledge and rigour to bring a successful conclusion to your case.

In addition to this the weight of third party intervention can often be enough to show that late payment will not be tolerated and encourage the customer to pay up.

Reality No. 4: Not all debts are collectable

Sometimes, no matter how efficient and effective your credit control processes are, outside forces can make some debts uncollectable. Fortunately, with the right preparations, you can plan ahead and protect your business from future uncollectable debts.

You should:

  1. Get to know your customers

You can reduce the chances of accepting orders from uncreditworthy or risky businesses by getting to know your customers and the industry they operate in before offering credit terms.

There are numerous ways you can obtain this important information, including using account opening forms, performing credit check/reference checks.

  1. Protect your cash flow

In some cases, credit insurance provides peace of mind when trading on credit terms by protecting against the threat of bad debts, whether due to insolvency or protracted default.

In the event an invoice becomes aged or a customer enters insolvency proceedings, credit insurance ensures that you get paid for any goods or services you have supplied, subject to a designated credit limit.

  1. Collect full or partial payment upfront

A different way to protect your cash flow from uncollectable debts is to take full or partial payment upfront.

Some businesses may be unprepared to pay upfront for goods or services they haven’t yet received, so this would be best employed where you have doubt about the creditworthiness of a debtor.

Reality No. 5: Your cash flow is at risk

Once an invoice exceeds terms it starts to have an impact on your cash flow. Without appropriate action, this can quickly escalate throughout the business and make it difficult for you to meet your own commitments, such as paying suppliers and employees.

You should:

  1. Update cash flow forecasts

To maintain a healthy cash flow, you need to be aware of exactly what’s going in and out of your company at all times.

Therefore, you should update your cash flow forecast as soon as you identify that an invoice is going to exceed its credit terms.

This allows you to spot any impending gaps in the business’s cash flow and put plans in place to improve your position.

  1. Spread your customer base as widely as possible

One late payment is undesirable, but if that customer accounts for a large portion of your revenue it can destroy a business.

Therefore, to protect your cash flow you should attempt to spread your customer base as widely as possible, rather than rely on a small number of customers.

  1. Build a cash reserve

A cash reserve is money that a business sets aside for use in emergencies. These savings can cover any shortfalls or unexpected costs and expenses that might arise.

A healthy cash reserve will buy you time and peace of mind when it comes to your cash flow and potentially be used to offset the cost of debt recovery.

Reality No. 6: Not all debt recovery agencies are the same

If you require external help to collect unpaid invoices and you choose to outsource its collection to a debt recovery agency, it’s vital that you find a company that meets and/or exceeds expectations.

You should:

  1. Find a debt recovery agency before you need them

Many businesses wait until they have a debt recovery need before finding a debt recovery agency. However, the pressure to get paid can mean that businesses make a quick decision and choose a debt collection partner that isn’t right for them.

Instead, it’s wise to look for a debt recovery agency ahead of needing their services. This way you give yourself more time to ensure they are the right fit for your business.

You could even set up an agreement where you outsource all debts that reach a certain age to relieve the pressure from your internal team – this works well as a process and debtors understand this may happen in the event of non-payment.

  1. Do your research

There are lots of debt recovery agencies in New Zealand, so it’s important to do your research to find the company that will bring the best results for your business.

There are various ways you can do this. Firstly, you want a relationship with a debt recovery agency that is going to bring results, so check that they have sufficient collections knowledge and experience –  sometimes a trial can help bridge the gap and ensure you are both on the same page before going exclusive.

As well as this, look for success stories and testimonials to ascertain if they have a successful background.

When it comes to trickier debts, sometimes sector expertise can bring knowledge and results to rival a typical generalist, so you might want to consider their experience in your industry.

  1. Understand the process adopted

Different debt recovery agencies may use different methods to recover outstanding payments hard-line legal or building a relationship with the debtor – we at Gravity Credit Management treat your debtors as our own, as ultimately, they are.

Each approach has different pros and cons, so it’s important to understand the differences and decide which option is best for your business needs.

Gravity Credit Management is a specialist debt collection agency with more than 25 years of experience. If you need help with debt collection or have questions, please get in touch with us at [email protected] or 0800 GRAVITY.

Andrew Kingstone, Managing Director
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