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Sales may be going through the roof, but is your debtors’ ledger going through the floor? Terry Brown outlines the importance of setting strict credit terms to keep cash flow healthy, and who to call when those terms are abused.

When considering whether to extend credit to a new customer you need to remember that you are, in effect, lending that customer money.

The word ‘credit’ is derived from the Latin word ‘credo’, which means ‘I believe’. So you need to believe that if you extend credit to customers you will be paid. After all, the money tied up in your debtors’ ledger is in most cases one of your major assets.

Once you’ve made the decision to grant credit, you’ll need to confirm the account opening to your customers and re-affirm your trading terms. Some of us are super optimists and state trading terms as seven or 14 business days. My view is that not only are those terms unrealistic, they are rarely met. Thirty days is reasonable and even if customers pay you within a short time exceeding 30 days, your anxiety level should remain low.

So it’s important to produce your monthly accounts in a timely manner. If you’re late getting accounts out to customers you can probably expect late payment.

All of us have tried various methods of attempting to accelerate collection of accounts. Methods range from offering settlement discounts for early payment (this can degenerate into a messy exercise); overdue stickers (humorous, cryptic, pleading and downright nasty) which might work once or twice; reminder letters (an expensive, time-consuming exercise with probably a low level of response); then there is the tried and true telephone follow-up—no doubt the most effective—but, learn when enough is enough. If the phone follow-up is not productive by the time your account reaches 60 days it is time to bite the bullet and bring in the ‘big guns’—the third party.

Most suppliers should have a business relationship with a mercantile agency (a debt collector). When selecting the best agency to work with your business, consider the following:

• Good reputation—any decent agency will gladly provide references.

• You want collected payments forwarded to you immediately upon receipt. Don’t agree to wait 30 or more days after collection to eventually get your money. Any agency that doesn’t offer this service simply doesn’t trust you to pay its accounts on time.

• Choose an agency that assigns a dedicated account manager—don’t become just another number.

• You want to be provided with copies of summonses issued against your debtors and copies of searches. After all, you are paying for those items.

• Ensure your agency pursues and recovers any interest on overdue accounts to which you are entitled, and that any interest recovered is passed on to you.


Building Relationships

It’s important to have confidence in whichever agency you select. Attempt to build a relationship with your agency account manager so you’ll feel comfortable asking for the agency’s advice on any credit/collection matter.

Most agencies provide standard demand letter systems on various commission structures. Choose an agency that provides a prompt service at a reasonable commission rate. Any rate exceeding 8 percent is, in my view, over the top. Remember the commission you pay is a fair price for achieving a positive result. It is a cost of doing business, but don’t agree to pay commission on, for example, withdrawn or credited accounts.

Having chosen an agency you should be aware of, and comfortable with, the agency’s procedure. Normally it will be a matter of you forwarding details of your overdue account to the agency with instructions for a demand letter. The success rate on demand letters with most agencies is around 75 percent. The remaining 25 percent of debtors require further attention.

That will mean commencing legal action against your debtor—this is when your credit application will prove its worth. If legal action begins you will be charged for court, search, service and solicitor fees—the majority of which is recoverable from your debtor. Your agency would expect you to pay those charges on normal 30-day terms and the charges would be refunded to you when recovered from the debtor.

The costs associated with legal proceedings vary according to the size of the debt and are comprised of court fees, professional fees, search fees and process server fees (all of which are recoverable). The agency can provide you with a schedule of those costs.

Keep in mind that whatever agency you choose, your agency staff are the good guys. They’re on your side, attempting to recover your money from the potential bad guys. If they can’t recover your account they’ve no doubt given it their best and most economical shot. If you have to write off a debt, it’s better to do it earlier rather than later, and concentrate on more productive activities.

* Terry Brown is managing director of Macquarie Collections. Macquarie has been the recommended supplier of debt collection services to GHA members since


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