I have recently been working on several very sad cases, where clients have all but lost their businesses due to creditors not paying bills.
More than one case required mediation between the client and the bank to avoid going into liquidation.
What's even sadder, is that part of the reason they face this is their own goodwill or their Kiwi attitude of "shake hands and she'll be right". The rules around social and business relationships do not mix.
It's not uncommon for small business owners to give credit to long-term or high-paying customers in the interests of keeping them happy, or to hand over goods or services to cash customers before the cash has been paid.
Sometimes even sales staff may bend the rules to help out customers.
In my mind, small business owners are on the back foot when it comes to dealing with bad creditors, in the face of corporate businesses which can afford to flex their muscles and pay for expensive security insurance.
So, while "she'll be right" may work out most of the time, it's simply risky. If you're in business you need to ensure you have secure structures around the majority of your business transactions.
The good news is, for the sake of a $3 fee, you can protect yourself by registering a "security interest" in a transaction on the Personal Property Securities Register (PPSR). This means you become a priority creditor and can take back any product you have not been paid for or you rank above other creditors for payment if a liquidation occurs.
Essentially, the PPSR is a list of who gets paid first and, while there's no guarantee of payment if a creditor goes into liquidation, at least you know you're on the list if there is money.
You can even register a security interest before any transaction documents have been signed, as soon as you suspect you're dealing with a customer on credit terms. As long as everything is eventually signed, you retain priority over the product supplied, ahead of other creditors.
It's not necessary to register transactions with all your customers. Assess the risk levels looking at how much loss you can recover from - $500, $1000? Certainly, where tens of thousands worth of product are at stake - as with the clients I have been seeing recently - paying $3 for some security is a no-brainer.
You should also review who you think your best customers are. Don't be lulled into a false sense of security by regular customers or those with big invoices. In reality, your best customers are the ones who pay their bills on time, every time.
When you consider the full impact of a bad creditor, creating a ripple effect throughout your business by limiting your ability to manage debts, make payments and potentially destroying key stakeholder relationships - why wouldn't you pay $3?
Even if registering with the PPSR for the first time may require the advice of a solicitor, that $300-$400 fee is a very small investment in your business security.
- Stephen Graham is a partner at BDO Rotorua chartered accounting and advisory firm