How Small Businesses Can Avoid Common Debt Collection Mistakes

Most small business owners will agree that a strong, consistent cash flow is fundamental to their business success. In Australia, the average invoice arrears time is more than 26 days – that’s 4 times higher than businesses in the UK and 3 times higher than businesses in the US.

However, there are some simple strategies you can implement to minimise the impact unpaid invoices can have on your business. Below we outline 5 of the biggest debt collection mistakes small businesses make, and how these mistakes can be avoided.

 

1. Not knowing your customer before you offer credit

When you offer credit to your customers, you are effectively offering them a loan. It is vital that you understand who they are and how likely they are to settle their debts with you on time and in full.

One of the easiest and most affordable ways to get to know your customer is to use business and personal credit reports. Depending on who you are considering offering credit to, you may be able to access one or both of these reports.

Business credit reports include ASIC extracts and business name searches, insolvency and bankruptcy details. They also include information on the business partners and directors such as defaults, past credit enquiries and a summary of other business relationships.

If a business credit report is not available, personal credit reports on the CEO or owner of the business can be used. These reports will demonstrate how they manage their personal financial responsibilities and provide insights on how you can expect them to manage their business obligations.

Be wary of offering credit to anyone if you can’t collect basic information like full names, ABN details, multiple phone numbers, email addresses and physical addresses.

 

2. Not formalising your agreement in writing

If you are offering credit, you are entering into an (potentially legal) agreement. Even if you know the customer well, a written agreement or paper trail provides both of you with a clear understanding of the service or product being offered, the agreed amount to be paid and the expected payment terms.

If any terms of the contract have been breached, this written agreement will support any debt recovery attempts you make, and improve your chances of having the debt resolved in your favour.

 

3. Not prioritising account receivables

Winning new business is vital to your business success, as is collecting payment for your products or services. If you do not already have internal capacity, or the right skill set to keep on top of your account receivables, consider outsourcing this function to a professional.

Ongoing and regular collection of overdue accounts is crucial for cash flow, and a good accounts receivable resource will stay on top of money owing to you, and follow an agreed process to chase any outstanding payments.

 

4. Not having a debt collection process

Your process does not have to complicated, but being clear on how you will recover debt provides a framework to protect your cash flow. The ACCC publish guidelines on best practice and this a great place to start when developing your own process.

Depending on your own internal systems, you can automate this function, but even if you are managing this manually, a check list with the steps you need to take, and when those steps need to be taken provides you with a clear course of action for debt collection.

 

5. Not using Debt Collection Agencies (when required)

Attempting to recover an overdue debt can be time consuming and stressful. If your attempts have not been successful, a professional debt collection agency can help. The agency will act on your behalf to recover the debt and resolve the issue. With many debt collection agencies now offering a no collection no commission fee structure, this can be a risk-free approach to protecting your cash flow.

Of course, you need to select your debt recovery agency wisely and ensure that whoever you work with complies with industry rules and regulations, is experienced and has a good track record of success.

By being mindful of these common mistakes and employing these strategies for successful account receivable management, you can concentrate on the core deliverables of your business and ensure your cash flow is protected.

If your business is being impacted by outstanding debts, get in touch for a FREE debt appraisal and a risk-free approach to debt collection.