Debt collecting myths...

Bad debts are part of being in business - As a small business owner you need to be much more careful in selecting your clients than any larger firm.
Pushing for payment of bad debts will lose you a customer - Anyone who isn't paying you is not a customer. By definition a customer is someone who wants what you sell; can afford it; and wants to pay for it.
Making people pay on time is difficult and expensive - Only if we go about it the wrong way.

Before we look at getting our money back, however, let's look at who we're actually lending it to in the first place! When you [as a small business owner or individual] open an account with a larger enterprise [Edgars, Siltek, Woolworths, etc.] they run a credit check on you to see what your history is like, and whether you're likely to pay them. Do you do the same thing for the clients you're lending money to?

If the amount at risk is high, the bigger supplier will usually take out debt insurance from Credit Guarantee - so that even if you do default - they will still get paid. Last time I looked the costs were about .5% of the debts - but their minimum premium each month means that it's probably not economic if your monthly sales are under R500,000. Check them out at www.creditguarantee.co.za.

The larger supplier also asks for personal sureties [and lots of personal details like ID numbers] from his clients. He does this to give him at least some recourse when things go wrong. Do you do the same thing with the clients you're lending money to? The larger supplier has rules. Break them and you're automatically on credit hold, and the legal engine starts up furiously to chase the outstanding amounts. Do you have similar rules, and are you as decisive when you apply them?

Bottom line - you need to take a few precautions before you willy-nilly extend credit. The credit you're extending is working capital that you'll need to find somewhere. That's usually an overdraft at a bank. And when you sign the documents for that overdraft, you're signing away your home and your life assets. So the question really is: Are you willing to sacrifice your home and everything that you've worked for since you left school - to lend money to me, a stranger that seems to want to buy your goods or services?

Most of us smaller folk don't run credit checks on prospective clients. We don't even check whether they stick to their monthly terms. Some of this country's leading retailers [businesses that most of us want as clients] have shocking reputations for slow payment.

Most of us smaller folk do not insure our debts. And when things go wrong we don't even have a decent collection attorney on hand - but hand the job to the fellow with the best yellow pages advertisement, or whose name starts with "A" so he's at the top of the list of attorneys!

Most of us smaller folk do not ask our clients for their personal sureties. [Just because I am asking you not to sign them doesn't mean that you shouldn't ask others to!] Most of us smaller folk don't even ask for personal or full company details. So when things go wrong and you need to chase money from a recalcitrant debtor - you start the race at the back and without a horse! No wonder that it's so difficult. Hopefully we've made the point about getting the initial stuff correct. Now let's look at the things you can do.

You must reach agreement up front on the cost of your product or service.
Disputing the details is a simple but effective way to delay paying debts. Your client needs to know what the invoice is going to be before you issue it. Please clarify the details when you make the sale, leaving no room for error. Rather lose the sale before you've invested your time and money in it, than afterward when you've got to waste even more time and money.

You must decide whether a debt is worth chasing.
It costs you time and money to chase debts, and legal fees if it goes too far. Smaller debts aren't worth chasing. Some bigger ones aren't worth it either. In my case I made a decision in 1992 that I would never sue anyone again over money, so my business is structured to issue small invoices to many people. That way no single client exposes me to uncomfortable risk.

You must have a no-fuss invoice and a reply-paid envelope.
Put all the details on your invoice that your client will need to make payment. The more obscure the invoice, the less likely you will be paid on time, and the more likely it will be queried. Getting the details right, and giving enough of them, makes it much easier for your client to pay you - as does the reply-paid envelope.

You must send your invoice immediately.
The shorter the time is between delivery and invoicing, the shorter the time will be between invoicing and payment. Ideally the invoice should be delivered and signed for at the same time as the delivery. You must set a strict deadline for payment. Tell the client exactly when payment is due. Not "Payment is due in 30 days", which is easily misconstrued, but rather "Payment is due before 28 February". Which is easier to understand?

You must build a sound personal relationship with the customer.
Well actually, you only need to do this if you want rapid payment - otherwise you won't even make it into the hat! You must consider incentives for prompt payment. Offer your clients a discount for rapid payment. Or a free add-on to the product - something like an additional 3 months warranty or service. Or maybe a free trip to the Bahamas [if your sales volumes justify it - getting the money in is more important than making the sale.

You must only deal with the authorized bill-payer.
The sale is over. The time for money is nigh. Doesn't it make sense to deal with the person controlling the purse strings at this stage?

You must grab the attention of the debtor.
You can do this in a variety of ways - but you must make sure that your invoice is not neglected. Send faxes [gentle]; plaster an enlarged invoice on their windows [aggressive]; DHL a brick with the invoice attached [aggressive and funny]; send along a large, unwashed gentleman with poor personal habits to await your cheque in their waiting room [aggressive and overwhelming]. You're limited only by your imagination.

You must check their cheque.
A marvellous way of delaying payment is to issue a technically deficient cheque! Check that the date works [not next month or last year]. Check that the amount in words matches the amount in figures. Check that it has enough signatures. Check that the crossing is not too restrictive [a cash cheque cannot have any crossings].

You must be persistent.
Your business won't survive without sales. Even less will it survive with unpaid sales. The activity of debt collection is probably the most important activity in your building. The big guys pay lots of attention to getting the flow right, and getting the right people to do it. How much attention are you paying to this issue?

You must pay your bills on time.
Do unto others as you would have them do unto you - a universal principle. You simply won't be confident enough in chasing your bills if you feel guilty about not paying yours on time. Nor will you feel any urgency in collecting.

Your business does not exist to deliver services and goods. Your business exists to exchange services and goods for money. The money is as important as the delivery. Aim to get your money as quickly as possible. Consider accepting credit cards. The 5% fee to the bank is not expensive when contrasted to the costs of collection [staff, phones, legal fees, bad debts...] and many clients will prefer to pay this way because they get free air miles.

Similarly, change your terms of business. You are a personal business, not an impersonal conglomerate with huge resources. Accept that, and work within the parameters. While it's difficult to change an historical relationship with an existing client, bring new clients in under the new, tighter terms.

Refuse business if it's too big or risky! Ask yourself a simple question: Is this single client worth sacrificing everything I have worked for since leaving school? If he is - go for it. If he isn't, suggest he go elsewhere [or send him directly to your supplier and collect a risk-free broker commission].

When things go wrong, don't mess around with the traditional way of collecting money. It no longer works in this country. if the amount is big enough, try for provisional liquidation as quickly as you can. It sends enough of a shock wave around that you will either get paid soon, or you will establish that there really is no money there! And keep your sense of humour. This is South Africa - you're going to need it.

Many of the ideas in this article were prompted by a superb book by Dr Neil Flanagan called Creative Debt Collecting. Much as I'd like to give you a link to it, I can't find it on Amazon or anywhere else right now.

© Peter Carruthers, www.petesweekly.co.za

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