The economic slowdown has made it even more important for organisations to take steps to effectively recover debts and minimise bad debt losses.
Collecting on receivables can be a time consuming process and business distraction diverting much needed resources away from core business activities to the time consuming task of “chasing” people for money owed.
As with many aspects of managing a small business, a proactive approach to managing the collection of debts will help you avoid the common pitfalls that can lead to a business’s demise. Risks associated with extending credit can be mitigated by proactive actions carried out before, during and after the extension of credit. The following points suggest best practices for effective small business debt management:
Before credit is issued.
- Never extend credit before adequate due diligence has been carried out and the risk has been assessed.
- Be selective and screen prospective debtors prior to the extension of credit to limit risk.
- Collect detailed information on debtors with information on past credit relationships.
- Documentation is critical – debts need to be evidenced by a credit agreement and/or promissory note signed by the debtor.
Once credit is extended
Watch for trends and early warning indicators such as customers who typically pay on time taking longer or extending credit terms.
Step up your collection efforts at the first sign of trouble and use leverage to force debtors to pay off old debts in order to get additional credit.
Control credit by paying attention to receivables and cash management to ensure adequate cash to cover expenses. If receivables form part of borrowing beware of violating loan covenants.
Keep good records and avoid islands of information. Ensure copies of credit agreements, correspondence, etc. are kept on file for reference.
Motivate early payment through offer of incentives such as discounts, order priority or other benefits.
Ensure your team understands how important collections and good collection records are to the success of the business.
Collecting from Debtors
Make collections a priority and stay on top of receivables by producing weekly/monthly reports to avoid excessive aging of debts. Prioritise your collection strategy using amount, days overdue, repayment potential, etc.
Timing is critical – the longer the debt is outstanding the greater the chance you will not get paid, especially if the debtor’s business fails or they leave the jurisdiction.
Find the right person for the job – determine which member of your team has the skills and temperament to do collections well. The wrong “fit” when it comes to collecting debt can cost you your business.
Persistence is key to success – be empathetic to sensitive situations, professional in communications, yet firm on collecting outstanding receivables.
Once you have exhausted your efforts at recovering past due accounts, referring the debt to a collection agency or legal professional is an option. The legal system in the Cayman Islands provides the means to pursue and effectively collect on debts. Credit bureaus and legal professionals offer the service of facilitating filing for collections in Summary Court or Grand Court if necessary. Unfortunately a court judgment that monies are owed does not always result in automatic payment of debt. Judgment creditors are therefore required to take steps to enforce the judgment.
Where a debtor leaves the Cayman Islands without repayment of debts a credit bureau may help in locating and collecting debt via skip tracing techniques and utilization of the global network of credit bureaus.
The decision to pursue debtors by partnering with third party agencies and legal professionals must consider the costs (both time and monetary) in relation to the loss as well as the potential business impacts within a small community where relationships and word of mouth advertising are vital to small business success.
Learning Solutions Ltd.
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