How To Avoid Bad Business Debts and Increase Cash Flow

1. How To Avoid Bad Business Debts and Increase Cash Flow Advance Debt Collection - Professional Debt Collectors https://www.advancedebtcollection.com.au/debt-collectors/

2. Table of Contents What are Bad Business Debts? How can I Avoid Bad Business Debts? Client Management Tip 1 - Choose your Clients / Customers Carefully Tip 2 – Do Due Diligence and Assess their Creditworthiness Tip 3 - Reference Checks before you Ofer Credit to New Customers Tip 4 - Investigate your Customers on Google and Social Media Tip 5 - Check Where and to Whom the Invoices are to be Sent Tip 6 - Find out Whether Customers Operate a Payment Run (monthly, 60 days, etc) Tip 7 - Factor the Potential for Payment Delays into your Cash Flow Forecast Tip 8 - Investigate Credit terms Insurance Options Tip 9 - Advise your Clients about Scam Emails Credit Management Tip 10 - Enter into a Written Credit Application Tip 11 - Establish Debt Collection Procedures Tip 12 - Set Realistic Credit Limits with the Debtor Tip 13 - Set your Payment Terms and Penalties Tip 14 - State your Terms and Conditions Clearly on Business Documentation Tip 15 - Invoice Quickly and Properly with Sufcient Detail Tip 16 - Get Sent / Delivered Receipts or use XERO / MYOB Tip 17 - Give Discounts or Incentives for Early Payment Tip 18 - Stay in Touch with the Debtor Tip 19 - Approve Additional Credit Extensions in Advance Tip 20 - Strict Processes for Payment and Follow Up Tip 21 - Up to Date Systems and Processes Tip 22 - Money Upfront / COD for Bad Payers Debtor Management Tip 23 - Chase Payment Immediately when a Debt is Overdue Tip 24 - Follow your Debt Collection Procedures Tip 25 - Ofer the Debtor a Cash Discount for Immediate Payment Tip 26 - Resolve any Debt Disputes Quickly Tip 27 - Reconsider the Business Terms with Regular Late Payers Tip 28 - Use Debt Collection Lawyers 3 4 4 5 5 5 6 6 6 7 7 7 8 8 9 9 9 10 10 10 11 11 11 12 12 12 13 13 13 14 14 14 15

3. 03 28 TIPS TO REDUCE BAD BUSINESS DEBTS AND INCREASE CASH FLOW Bad business debts and lack of sufcient cash fow can cripple a business. As a business owner you should always be thinking about reducing bad business debts and getting those delinquent invoices paid. This is even more vital in times of fnancial uncertainty such as before a recession or downturn. This eBook will provide you with 28 tips to reduce your bad business debts and increase your cashfow in preparation for the uncertain fnancial future in Australia. As the old saying goes, “prevention is better than cure”. Or the old proverb says, “it is better and more useful to meet a problem in time than to seek a remedy after the damage is done”. This complete guide will outline what you can do now to reduce bad debts in your business before incurring the debt, while the credit is active, and upon default. But what is a bad business debt? What are Bad Business Debts? A bad business debt is incurred when a business has provided goods and services to a customer / client, and that customer / client has not paid the invoice within your payment terms. For example, if you have given seven (7) day terms, then that debt becomes a bad debt if it remains unpaid on day eight (8). However, there are several steps that a business owner can take to reduce or minimise these bad business debts, increase cash fow, and increase proftability.

4. 04 How can I Avoid Bad Business Debts? Section 95A of the Corporations Act 2001 (Cth) defned insolvency. It says: (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. Lack of cash fow can mean that a company is insolvent and runs the risk of being wound up in insolvency. This is a worst-case scenario, but it is becoming very real for a lot of Aussie companies. We have devised a three (3) step process for managing bad debts in your business. These steps are: Client management; Credit management; an Debtor management. 2. 1. 3. Client management relates to the steps that a business can take prior to the client / customer being ofered credit terms. Credit management relates to the steps that a business can take setting up and managing the credit terms. Debtor management relates to the steps that a business can take with delinquent or bad debts when the customer defaults. We will explain in more detail below. Client Management There are a number of tips and things to consider during the client management stage. These include: Choose your clients / customers carefully; 1. Do a due diligence and assess their creditworthiness; 2. Reference checks before you ofer credit to new customers; 3. Investigate your customers on Google and social media; 4. Check where and to whom the invoices are to be sent; 5. Find out whether customers operate a payment run (monthly, 60 days, etc); 6. Factor the potential for payment delays into your cash fow forecast; 7. Investigate credit terms insurance options; and 8. Advise your clients about scam emails 9. These will be explained in more detail below.

5. 05 Tip 1 Choose your Clients / Customers Carefully It is especially important to choose your customers wisely. One bad customer can create a huge amount of lost time and stress trying to recover the bad debt. So much so that in some cases it is better for business if you do not have them as a customer. If you take the time at the beginning to do some preliminary investigations, then it could save you a massive headache when experienced debtors inevitably default. Tip 2 Do Due Diligence and Assess their Creditworthiness One way to check on your client is to do some due diligence before giving credit terms. Do your due diligence for the company and also the director(s) of the company to see if they have any defaults or judgments in their history. Also, to be extra-careful you could do an ASIC historical director search to see if the director(s) of the current company was (or is) the director of another company in liquidation or with a bad credit score. Lastly, do a Court search to see if they have been involved in any litigation (as plaintif or defendant). Tip 3 Reference Checks before you Offer Credit to New Customers You should always obtain at least three (3) trade references for your customers – and call them and check up on them. There is no point asking for references and then not calling them and asking them questions. Ask the trade references if they are good payers, if they were ever late with payment, and if they would ofer credit to them again in the future.

6. 06 Tip 4 Investigate your Customers on Google and Social Media Spend 5 or 10 minutes Googling the business / company / person and see what comes up. It is surprising what you will fnd. A lot of people take to the Internet or social media when they have not been paid by a debtor, so if they are bad payers then there could be a wealth of information there. A search of the ASIC Insolvency Notices website for any insolvency related events. Alternatively, you could conduct a bankruptcy search to see if the client / customer has been bankrupt. Also check the Courts website for any current or historical proceedings that may need to be addressed. Once you have all of this information, you can make an informed choice about taking them on as a customer. Tip 5 Check Where and to Whom the Invoices are to be Sent One of the biggest excuses we hear is “we didn’t receive the invoice” which, after sending 9 times, becomes difcult to believe. Get a number of diferent emails and people to send the invoice to. This can include the director, the accounts person, even the accountant. If they default, then send it to reception too or the admin@ or info@ email addresses. Tip 6 Find out Whether Customers Operate a Payment Run (monthly, 60 days, etc) Ensure that you have familiarised yourself with the customers payment run. They could simply have 30 or 60 days as a matter of internal policy. Government agencies do this and although they will usually pay, it is worth understanding what their payment run terms are. For example, if its 60 days, then you might want to think if you can wear that debt on your books. Talk to your accountant about this.

7. 07 Tip 7 Factor the Potential for Payment Delays into your Cash Flow Forecast While speaking with your accountant, it will be worth asking them about the potential for payment delays into your cash fow forecast. A business owner must identify how much cash the business is going to get in from payments, interest, service fees, collection of bad debts, and other income, and when? Identifying the risks early can inform you to be able to take measures if required. Again, speak to your accountant about managing payment delays in your cash fow forecast, or search for a new accountant. Tip 8 Investigate Credit terms Insurance Options Another option to mitigate risk is the option for obtaining credit insurance. Credit insurance insures a business against your customer failing to pay your invoices, covering every invoice with that particular customer for the term of coverage. Again, you should seek professional advice in relation to if credit insurance is right for your business. Tip 9 Advise your Clients about Scam Emails There has been an increase in email scams in recent years. These are sometimes called the business email compromise (“BEC”) scam, or the CEO scam. Basically, a hacker hacks the business, sending fake emails to your customers stating that you have changed bank accounts and that invoices are to be paid into a new account. This being the account of the thief. We are seeing this more and more in our debt collection practice. It is vitally important that you include in your terms and conditions that any changes to bank accounts must be confrmed in writing, or the customer is liable for the debts. If you need help and assistance with any of the above then visit us at https://www.advancedebtcollection.com.au/ or give us a call on 1300 85 19 10 Moving Forward If you feel comfortable with taking the new client and providing them with credit, then there are several things that you can do to manage the credit.

8. 08 Credit Management There are several tips and things to consider during the credit management stage. These include: Enter into a written credit application; 1. Establish debt collection procedures; 2. Set realistic credit limits with the debtor; 3. Set your payment terms and penalties; 4. State your terms and conditions clearly on business documentation; 5. Invoice quickly and properly with sufcient detail; 6. Get sent / delivered receipts or use XERO / MYOB; 7. Give discounts or incentives for early payment; 8. Stay in touch with the debtor; 9. Approve additional credit extensions in advance; 10. Strict processes for payment and follow up; 11. Up to date systems and processes; and 12. Money upfront / cod for bad payers. 13. These will be explained in more detail below. Tip 10 Enter into a Written Credit Application I cannot emphasise this enough. Enter into a written credit application with the best clauses to protect you should the debtor default. As a minimum these clauses should include: Defnition of default and breach; 1. Security for the debt; 2. Personal guarantees; 3. Legal & debt collection costs upon default; and 4. Default interest. 5. For more information of credit applications – Visit our partner credit contract page.

9. 09 Tip 11 Establish Debt Collection Procedures It is vital that you establish debt collection procedures and accounts receivables processes. These processes in the credit application will help you if and when the customer defaults and does not pay their invoices. Good debt collection processes established from the start of the relationship is vital if the relationship goes wrong. Tip 12 Set Realistic Credit Limits with the Debtor To reduce the risk of bad debts it is important that you set realistic credit limits. Setting credit limits that work for both you and your customer is a great way to minimise the amount of outstanding debt owed to the business upon default. Minimise your bad debts by setting realistic credit limits, enforcing that limit, and not providing further goods and/or services until that limit has been paid down. Tip 13 Set your Payment Terms and Penalties You can reduce bad business debts by setting your payment terms and enforcing them. If the customer pays outside of these payment terms, then you should have strict penalties which should be applied upon default. Setting these payment and penalty terms early and strictly enforcing them is key to reducing bad business debts. Although care should be taken to maintain the commercial relationship between you and your client.

10. 10 Tip 14 State your Terms and Conditions Clearly on Business Documentation It is important that you state your terms and conditions clearly on all business documents. State the payment terms on each invoice, and on your statements to that company. If you enforce your terms with your customer a number of times, then it will be less likely that the customer will default. Tip 15 Invoice Quickly and Properly with Sufficient Detail It is vital that you invoice quickly. Invoice on the same day if possible, or the next day at the latest. If you have a busy business then it might be difcult to keep on top of sending invoices quickly, but you must implement a procedure so that this happens. It is also important that you particularise the details on the invoice correctly. If the customer defaults, then you have ensured that there cannot be any confusion in relation to what the invoice was for. This is especially important for issuing building and construction payment claims, or when issuing statutory demands. Tip 16 Get Sent / Delivered Receipts or use XERO / MYOB If you are sending the invoices by email, then it is important that you get a read receipt and a delivery receipt. These can be used as proof that the invoice was delivered and/or read by the customer. A delivery receipt and a read receipt can be obtained in Outlook by doing the following: Step 1 – From the email you are sending the invoice – choose “options” Step 2 – Click inside the “request a delivery receipt” box with a tick Step 3 – Click inside the “request a read receipt” box with a tick. Once this has been done, you will get a receipt to show that the email has been delivered. However, the customer will have to send a read receipt, which they generally do not do. Alternatively, if you send your invoices from inside MYOB or XERO, then it tracks if the invoice has been delivered, opened, etc.

11. 11 Tip 17 Give Discounts or Incentives for Early Payment You can also give discounts or other incentives to encourage early payment of invoices. This can be a percentage discount of the total of the invoice, or incentivise the customer in another way, such as still receiving goods / services from the business. A business can also provide disincentives for late payments to reduce bad debt such as penalty interest, or late fees. Tip 18 Stay in Touch with the Debtor Communication is the key to an efective bad debt reduction strategy. Most people will not mind if a customer is a few days late with payment as long as it is communicated correctly. Contact the customer the day before the default and speak to them about paying the debt. Can they pay? If not, why not? Have they already paid? Having a good line of communication with your clients is a great way to keep on top of bad business debts. Tip 19 Approve Additional Credit Extensions in Advance Sometimes a customer will be nearing their credit limit and then seek to get more goods / services on credit. It is important that a business has systems, checks, and balances in place to ensure that (a) the customer cannot go over their credit limit; and (b) any increases to the credit limit are approved by management, or not. In our practice we have seen cases where these systems were not in place and the customer was allowed to run up considerable debts, unbeknown to anyone at the business.

12. 12 Tip 20 Strict Processes for Payment and Follow Up As part of the processes for managing credit with a customer, a business should ensure that strict processes for payment and follow up are implemented. Perhaps a reminder set for 1 week before the due date; then 2 days before the due date; then the day before the due date. Getting out in front of these bad debts will be the key to mitigating any bad business debts. Tip 21 Up to Date Systems and Processes It is also important that you keep up to date systems and processes. If you have identifed a gap in a process, then change it. Keep an ‘accounts receivable manual’ for example, and keep changing, updating, and evolving these processes to make them tighter and tighter. Also, consider utilising technology to better reduce of minimise bad business debts. There are a number of diferent accounts receivables software on the market, and this could be a great investment for your business to minimise exposure to bad payers. Tip 22 Money Upfront / COD for Bad Payers If you think that a customer will likely be a bad payer, then you can simply ask for payment upfront or cash on delivery (“COD”) to start, before ofering credit. Alternatively, a business could structure a 50% upfront and 50% credit to begin with. A business should not be afraid to ofer an introductory period to a new credit customer, or an introductory 7-day payment terms, for example. Let the customer prove themselves frst. However, although you can take every precaution to mitigate the risk of incurring bad business debts, it is still possible that you have a debtor who does not pay their invoices. In that case, you will need to have some debtor management options. If you need help and assistance with any of the above then visit us at https://www.advancedebtcollection.com.au/ or give us a call on 1300 85 19 10

13. 13 Debtor Management There are a few tips and things to consider during the debtor management stage. These include: Chase payment immediately a debt is overdue; 1. Follow your debt collection procedures; 2. Ofer the debtor a cash discount for immediate payment; 3. Resolve any debt disputes quickly; 4. Reconsider the business terms with regular late payers; and 5. Use debt collection lawyers. 6. These will be explained in more detail below. Tip 23 Chase Payment Immediately when a Debt is Overdue Notwithstanding all the attempts a business has made to stop the late payment, if a payment is late it is important that a business chases payment immediately when a debt is overdue. The very next day after the due date for payment, the business should send a friendly overdue payment letter, followed by increasingly more demanding letters as time goes on. If a business can quickly jump on bad debts, and keeps seeking to recover overdue payments, then this will likely encourage the debtor to pay. Tip 24 Follow your Debt Collection Procedures A business should follow its debt collection procedures. If the credit contract has a charging clause, then lodge a caveat. If the credit contract has a PPSA clause, then seek to recover the collateral. Send a letter of demand to the customer and any of the personal guarantors. By starting with the debt recovery process and procedure, it may encourage the debtor to pay rather than risk losing person assets or having to pay legal costs for legal action.

14. 14 Tip 25 Offer the Debtor a Cash Discount for Immediate Payment Another thing to consider is compromising the debt and accepting a discount for immediate payment of an overdue debt. If you are forced to commence legal action to recover this debt, then you will always lose money in legal costs. Even if you obtain an indemnity costs order, it will still not compensate a business 100%. With this in mind, a business should consider ofering a discount for immediate payment. This will increase cash fow and save on legal costs. Tip 26 Resolve any Debt Disputes Quickly Sometimes a debtor will not pay because they dispute the goods / services. This may be that the goods were not merchantable quality, or the services were not provided correctly. As above, we always advise clients to try to resolve these debt disputes quickly, because the longer a dispute drags on, the more money you will spend on legal costs and the chances of resolving the dispute become less and less likely. We would always recommend that you engage a lawyer to negotiate a settlement to a debt dispute. Tip 27 Reconsider the Business Terms with Regular Late Payers If a customer continually pays late, then you should ensure that the credit application is able to be changed by the business. A business can reconsider the business terms with regular late payers to ensure that the business is fully protected against bad business debts from this customer. If the customer wants to continue with the commercial relationship, then they will enter into a new credit contract.

15. 15 Tip 28 Use Debt Collectors We would always recommend that a business engage debt collectors to resolve the debt dispute. Advance Debt Collection provides debt collection and debt recovery services to individuals and businesses Australia-wide. We understand the frustration and stress that comes with trying to get someone to pay what they owe, and we can help you get the money you're owed. The team at Advance Debt Collection has been providing efcient debt collection services for more than 20 years, aiding businesses in Australia to recover bad debts and enhancing their cash fow. As a national debt collection agency, our debt collectors employ debt recovery strategies to ensure prompt payment of your debts at a minimal cost to you. Our experienced team of debt collectors also prioritise ethical and respectful approaches in order to maintain positive relationships with creditors. With a focus on both personal and commercial debt collection, we have the expertise necessary to resolve overdue debts for companies of all sizes. If you need help and assistance with any of the above then visit us at https://www.advancedebtcollection.com.au/ or give us a call on 1300 85 19 10