Know your customers: Follow these 3 tips to get paid fast and reduce bad debt

Know your customers

Cash flow is the lifeblood of an SME so having a strong payments process is essential. Debtors might look good on a balance sheet as an asset, but for a business to grow through investment and consistent operations, customers need to pay their bills, and on time.

As well as having good credit control, you need to conduct a background check process before you even do business with a new customer. This will limit significant risk and increase the potential longevity of your business.

Know Your Customer

You shouldn’t do business on credit terms unless you know something about your customer. It is too much of a risk to simply assume that your customer is doing business in good faith and that they have every intention of paying you.

It is also too much of a risk to blindly accept that because a business exists, it is reputable and trustworthy.

There are ways to check a company. This doesn’t guarantee payment, but it reduces risk and gives you some peace of mind.

Obtain the company ABN (Australian Business Number) and use the lookup facility on the Australian Business Register. Doing this will enable you to see the company structure and their location and also see if they are registered for Goods and Service Tax. 

It is also worth checking the ASIC (Australian Investments and Securities Commission) because, the data on the ASIC and ABR are not always in synch.

Another task in knowing your customer is due diligence.

This is an involved task so it should be saved for customers with whom you’re looking to build a long term relationship or for a customer who wants to place a large order on credit.

It used to be a lengthy process to carry out a credit check but thanks to developments in credit referencing software and websites and the increasing use of cloud accounting, we are moving closer to real-time visibility of a customer’s creditworthiness. 

Setting the Terms

Getting the terms right is an essential factor in the payment process. Not only do they indicate the period the customer has to pay but they form part of your terms of trade. To form a binding agreement, the terms must be agreed to at the point the customer incurs the debt. It is not enough to just have your terms on the invoice. Terms should also be stated if you provide quotes for customers.

It is acceptable to set a standard payment term for all your customers but if you are top of your game and checking each customer via ABR and ASIC, it is worth going the further step of setting terms for each individual customer. Doing this enables you to manage risks by asking for deposits or up front payments for less-favourable customers and reward diligent customers with longer terms and settlement discounts.

To avoid any confusion or ambiguity, or indeed later contention, it is good business practice to confirm the agreed terms in writing.

A periodical audit of your terms is also good business sense. This helps you identify important business markers such as persistent late payers, value of settlement discounts given, and number of debtor days.  

Registration as a secured creditor

Even after carrying checks for creditworthiness, there will be times when customers won’t or can’t pay.

While a debt collection agency can offer some redress by working to achieve the collection of payments that are due, there is also something that few business owners are aware of that offers some risk reduction in the case of your debtor being unable to pay because of liquidation.

By signing up to the Personal Property Securities Register, you become a secured creditor.

As a secured creditor you avoid “clawback” (voidable preference), so if your customer goes into liquidation, you will receive amounts outstanding before the liquidator. If you are not a secured creditor you will only receive a pro-rata payment based on money available between all unsecured creditors.

These steps will give you the best chance of working with creditworthy customers who pay their bills on time. If you are still finding it hard to reduce slow payers or you have an ever growing volume of bad debt, you should get a free debt appraisal from reputable debt collectors. Most will offer a free consultation to assess your debt situation, and if you decide to engage them in their services, many will also offer a no collection, no commission service, whereby you will only pay them for the debts they recover on your behalf, minimising costs to your business.

About the Author
Local Recoveries Group is one of Australia’s leading debt collection and recovery specialists. With extensive experience as an industry leader in debt recovery and slow payer management, they have built a reputation as one of the best debt collectors for enterprises of all sizes. Servicing businesses from all sectors, they provide specialised debt collectors Brisbane, debt collection Perth and slow payer management services to businesses across Australia, New Zealand and United States of America.