Got debtors? Tips on how to avoid and respond to debtors

Overdue payments are a fact of business but there are simple ways to help manage debt collection without it adversely affecting your business or your relationship with customers.

How you approach collecting debt will depend greatly on the business or the person you are dealing with. Helping a business overcome a difficult period might earn a loyal client so ideally it's good to work on an outcome that maintains the relationship.

Here's what you can do to avoid debtors in the first place or collect it when you need to:

Get credit checks
If you offer customers credit you should check that they deserve it. Often the pressure to gain new business means credit checking is minimal or non-existent which can rebound on your business. Credit checking agencies include Baycorp Advantage and Dun & Bradstreet .

Set credit limits
Just as most cards have a credit limit your business should set a limit for each customer. Alternatively you can put an automatic stop on all overdue accounts but if you have staff managing this process make sure they check with you first.

Get onto problems early
The sooner you chase a debt, the more likely you are to be paid. Put in place systems so you can spot payment problems before they escalate.

Be clear about your terms of trade and get agreement
Make sure your customers understand and accept your terms of trade. If they do not sign an acceptance they may later claim they did not know about them or agree to them. This is particularly important if you intend to charge interest on overdue accounts or retain ownership of any goods until they are paid for.

Follow-up effectively
The best ways to collect debts - in the order of effectiveness are - a personal visit, a personal phone call or a letter or email. The more personal the contact made with the debtor, the more difficult it is for you to be ignored.

Be consistent
An important part of debt collection is consistency. You send mixed messages if you ignore late payments, when your business is cash rich, and at other times take a harder line, when you're facing your own cash crunch. The worst approach is to do nothing because that suggests your business is careless.

Sustain the relationship
When you follow up on a debt be polite but firm and always follow through on what you say you are doing to do. If payment is promised by a certain date, note it in a diary and follow up in a day or two if it has not been received.

Ask why payment is late
Find out if there is a dispute about the invoice and, if not, the reason for the delay in payment. If there is a cashflow crisis one option is suggest that the customer pay you by credit card. They will have 50 days grace before they need to settle with the credit card company and you get paid.

Debt collectors
Debts can be handed over to reputable collection agencies and it is useful to have the contact details of a suitable agency. This removes the unpleasantness of chasing up really difficult customers but does come at a cost. For debts under $100 this method would not be worthwhile.

Court action
This is an option of last resort once all other avenues are exhausted. It's essential you weigh the cost and time involved against the likelihood of payment. While you may be angry about what has occurred, only take court action if it makes business sense. It's a judgement call so get expert advice.

This article is based on an online training module, "How to collect debts", offered by New Zealand Trade and Enterprise. For more business training modules and programmes, visit the NZTE website.