In a perfect world, all customers would pay their debts on time and in full. However, all business owners know that unpaid debts are a common part of doing business. Nevertheless, there are some steps you can take when entering into agreements with new customers to make it easier to recover any debts if they arise. This article gives you five practical steps to follow to minimise any issues with unpaid debts.

1. Pick the Right Customer

Too often, business owners aren’t aware of who exactly they’re doing business with. Is it an individual trading under a business name? Or, is it a registered company? It is essential to know exactly who or what your customer is. This ensures that you can contact the correct individual or legal entity if any issues surrounding debts arise.

If the customer is a corporation or organisation, you might consider requesting that any relevant individuals, such as directors, sign a personal guarantee to secure any debts they owe. Neglecting to do this can be disastrous if they do not pay their invoices.

For example, it may mean that invoices are issued to the wrong entity. Then, you will be unsure of which entity to target if you need to commence legal proceedings.

The most common types of business structures are:

  • sole traders: an individual legally responsible for the business who often trades under a registered business name;
  • companies: a legal entity separate from its shareholders and directors;
  • partnerships: two or more individuals or entity operating a business together;
  • trusts: an entity that holds property or income for the benefit of others.

2. Get All the Customer’s Contact Details

This seems simple, but you should ensure that you get as many current and accurate contact details for the customer as possible. Many debt recovery proceedings can be frustrating because the correct entity or individual can not be located. Furthermore, your initial steps to follow up an unpaid invoice may become delayed because you can’t contact the customer.

When accepting a credit application or entering into an agreement with a new customer, make sure that they provide all contact details, including:

  • for companies, the registered business address of the company, along with a place of business address. This must be a street address, not a PO box;
  • the full name, address and date of birth of all company’s directors, partners or principals; and
  • for individuals, email addresses, contact numbers and the street address at which they can receive documents. As above, this must be a street address, not a PO box.

3. Have a Good Contract

The most important way to secure payments is to enter into a written agreement with new customers. If appropriate, this may be in the form of a credit application. Or, it could be a contract including the full terms and conditions for your business.

Along with contact details, ensure that your new customer provides relevant bank details. This will include their:

  • bank account;
  • BSB; and
  • bank location.

The agreement should also set out your payment terms including:

  • accepted payment methods;
  • due dates for payments;
  • any terms of credit; and
  • debt collection policies.

4. Do Your Homework

Once you know who you are dealing with, do some basic homework to check on the party’s credit history. There are specialist organisations that will provide credit checks for a fee. You can check if:

  • the individual has been bankrupt;
  • the company has any insolvency issues;
  • there are any current judgments against the customer; or
  • there are other negative marks on their credit reference.

Any credit application should also require that customers provide at least three trade references. Make sure that they include the references:

Follow up with all trade references provided to check the customer’s credit history with other suppliers. If you do find negative information, you can discuss it with the customer and seek further information about their current status. If you decide to continue doing business with the customer, you will them know to monitor payments closely and take action quickly if required.

5. Keep On Top of Debts

As a general rule, take action on unpaid invoices as soon as possible. Although you can take legal action on debts for up to six years after they are due, you are more likely to have success if you act closely to the invoice date.

It is better to know if there are any issues pursuing debts when the sum owed is small, rather than waiting for some months and having to write-off a substantial sum. Furthermore, the legal costs involved in pursuing a debt will increase depending on the size of the debt.

Key Takeaways:

Unpaid debts can create serious issues for small to medium-sized businesses. Taking some simple steps before you enter agreements with new customers can save you money and stress if customers avoid paying invoices later on. At all stages of your relationship with the customer, you should conduct due diligence on both their background and also when chasing up payments. If you have any questions about business contracts or need assistance with debt recovery, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.  

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.
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