10 Tips on how to avoid having bad debtors

If your debtors don’t pay you promptly (or at all) your business can be put at risk.  Taking some simple steps before giving credit, and acting quickly if a debt goes bad, can make all the difference to getting paid.

Here are some useful tips to help with making sure you get your money into your account where it belongs:

1. Collect information from the customer before giving credit, such as contact details and references.  Find out if they are who they say they are, e.g. ask for a driver’s licence and keep a copy for your records.In our experience we deal with many debtors that are very hard to locate.  One in particular owed a significant amount through an overdue credit account, and we later found out that this debtor has been going around town signing up for several different credit accounts with different providers, with a fictitious identity.  To avoid this happening to your business ensure that you have sufficient information and records about your customer.For larger credit accounts ask for security over assets they currently own.  If they do not want to put their assets on the line why should you risk yours?
2. Make sure that the credit account application forms are completed thoroughly.  An important part of a credit account application is the signature of the customer, this ensures that the customer is aware and accepts liability should they fail to meet the agreement’s terms and conditions.  In a recent case, an unsigned credit account application form could not be used in legal proceedings against the debtor because the debtor claimed that he was unaware of his obligations and that no agreement was signed.Ensure that the credit account application forms are fully completed and also signed.
3. Verify all details in the credit account application form before approving credit i.e. referees.  Referees are third parties who will give background information regarding the credibility of the borrower.  Also get details of a relative who does not reside with the debtor.  They are a useful source of information when you need to locate or contact the debtor.In one of our recent cases a debtor named his aunt as his relative.  When the debtor started defaulting on payments and was nowhere to be located, we contacted her and she advised us that the debtor had shifted and provided us with a new contact telephone number and address.
4. Ask for at least two contact phone numbers.  The more contact details you have, the easier it will be for you to get in touch with the debtor.  Do not just get a mobile number as these are easily changed.
5. Check that payments are being received as agreed on time and on a regular basis.  If you set up an arrangement with the debtor, it is essential that you monitor their payments.  Diligent book keeping encourages debtors to keep up with their arrangement.  We recently received a letter from a debtor thanking us for sending reminders of his monthly balance to pay which helped him budget and assisted him in clearing his debt.
6. Consider getting direct debits signed rather than using an automatic payment authority.  Direct debits will give the creditor control where automatic payments can easily be stopped by the debtor.
7. Keep good rapport with your debtors and encourage communication.  Keep full notes of any promises to pay.  These are often vital to proving liability in Court.
8. Don’t be afraid to ask questions as there may be something you need to know about why are they struggling with their accounts?  Your debtor may be in  financial hardship or dealing with a difficult situation.  As a creditor it is important that you are aware of your debtors circumstances at all times as it may affect their ability to pay you.We recently had a debtor under an arrangement to pay their debt on a monthly basis.  We noticed that after several months the debtor would short pay their instalment payments but managed to catch up the following month.  This caused further collection fees and interest to accrue.  We contacted the debtor and enquired why there was this pattern of payments throughout their arrangement.  The debtor advised that their funding is only received on a two monthly frequency.  We amended their arrangement based on the time their funding was received and now they are paying regularly as promised.
9. Act quickly, the quicker you chase up a debt the more likely it is to be paid.  If the trail goes cold you go to the bottom of the pile of bills.
10. Remember it is your money, it should be in your bank account not in the debtor’s.