How Updated Credit Applications Can Save Your Business

How Updated Credit Applications Can Save Your Business

Last month, I spoke to nearly 500 new businesses that all lost money to a company that entered liquidation. The debts involved ranged from a few hundred dollars to hundreds of thousands.

On top of that, I had existing clients who needed help with their outstanding invoices. If you add all that up, that’s a lot of money owed that never finds its way back.

The Vicious Cycle of Bad Debt

Dealing with so many companies in financial trouble is normal in my line of work. But for the people I speak with, this is anything but ordinary. For them, the pain and frustration is still fresh. Who can blame them? They’d just lost so much of their hard-earned money and are unsure how to move forward.

As one client shared,

My debtor is in liquidation. What hope is there? I won’t see anything now. They were obviously trading insolvent. They signed a statutory declaration saying they paid all their subcontractors, but I haven’t been paid. They give their terms and if I don’t agree to them, I don’t get the work. It won’t change until the government does something about it.

This is quite a common plight in these days. I’ve even had clients whose debtors take the insult one step further by buying cars and other properties while they’re supposed to be under liquidation. There are also debtors who begin trading under new companies—a technique that is called “phoenixing”.

How to Avoid Bad Debt

In situations like the above, bad debtors are essentially using your company as a bank where they can get an interest-free loan. A loan they can pay whenever they like, if at all.

To stop this from happening to you, follow these steps:

1. Create a Strong Credit Application

Having a credit application with a detailed set of Terms & Conditions is the most effective way to protect your business from bad debt. This document serves as a formal agreement between you and your customer.A strong credit application clearly outlines:

  • the name of the company entity you are dealing with
  • the person or entity responsible for paying the bill to you
  • that you and your customer agree to all the terms specified in the application.
  • that you are prepared to extend credit to your customer for the purpose of doing trade.
  • that you are not a bank offering interest-free terms.
  • that you are granted the right to cease supply if terms are breached.
  • the person responsible for the debt if the debtor’s company is unable to pay.

2. Consistently Update Your Credit Application

Many companies have out-of-date or obsolete credit applications, and this makes them extremely vulnerable to financial loss. Avoid this issue by consistently checking your credit application and updating it whenever necessary. Also, make sure your credit application includes the following details:

  • payment terms
  • amount of credit you’re prepare to extend to your client
  • laws that govern your industry
  • specific timeframe to raise a dispute
  • payment terms in the event of a dispute
  • consequences of non-payment
  • necessary steps to take to prevent the occurrence of bad debts

Let Us Help You!

If you’re not quite sure how to go about creating or updating your credit application, worry not. Slater Byrne Recoveries is here to help.

We offer a free evaluation service for Terms & Conditions. With our team of solicitors, we’ll review your existing terms to see if they are up-to-date and advise if they offer adequate protection in your industry.

For more information about this process, feel free to contact us and an accounts manager will assist you.

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