>>Staying Cool in a Hot Debt Climate

Unless you have been living in a vacuum for the last two months, you could not have failed to notice the recent news headlines regarding rising debt.

On 1 August 2007 Sydney Morning Herald journalist Jessica Irvine, in her article SUPER DEADLINE TRIGGERS DEBT BINGE (1), reported that “The debt binge has led to the biggest monthly jump in personal lending on record". Likewise, in July 2007 that same publication carried an article headlined BANKRUPTCY SOARS AS CITY FEASTS ON EASY CREDIT (2). What debtor could fail to break out in a sweat over such headlines? What creditor could fail to examine their debtors’ ledger to avoid being caught short?

While the headlines hail a warning to debtors, creditors should likewise heed the message – prepare for increased debt collection and ensure you have sound credit processes in place. Staying cool in the current debt climate requires a combination of both.

Your responsibilities as a creditor

If you allow your customers to pay over any period of time you are extending credit to them and are therefore classified as a “creditor”. By extending credit to your customers you are making it easier for them to do business with you, but you also need to ensure that your business is adequately protected.

Have your customers signed a Credit Application which secures vital information about who you are dealing with, and allows you to assess their credit worthiness before you extend credit to them? A flaw in your credit assessment process may mean, for example, that trade references are not checked or guarantees not requested or properly signed. It is surprisingly common for flaws in the credit assessment process not to come to light until AFTER a debt recovery service provider has been asked to sue a customer for an unpaid debt. In many cases, this means that the problem could have been avoided all together.

What do you need to do?

Implementing sound credit policies and procedures, coupled with aligning yourself with a knowledgeable debt collection service provider, should be your goal.

Conduct a Credit Health Check to determine whether your business is up to the challenge. Ask the questions:

• Do I have a Credit Policy in place?
• Is it in writing?
• Are my staff trained in the processes and procedures of the policy?
• Do I have sound credit documentation in place with my customers?
• How quickly do I take action on overdue accounts and what methods do I use?
• Do I know where to outsource my debt collection if I need to?

Outsourcing debt collection: Who to and When?

Many businesses carry out a certain amount of debt collection themselves before outsourcing a debt to their debt collection service provider.

How early you outsource collection of a debt can affect your ability to recover it. Allowing a debt to remain uncollected on your ledger for 90 to 120 days for example adds to the time you are out of pocket, and whilst the individual debts may not be large in size their cumulative number can cut a sizable hole in your bottom line. You need to establish clear procedures that cover when you will start trying to collect the debt using internal resources, what methods you will use, and when you will outsource.

Outsourced debt collection can encompass a wide range of activity, from the issue of letters of demand and follow up calls for payment to the initiation of legal proceedings and enforcement of a judgement.

When considering your choice of debt collection providers, there are distinct advantages to having this service performed by a specialist firm of solicitors. These include:

Most importantly, a debt collection service provider should be an extension of your internal team and be well-versed in your internal policy for debt recovery. They should also be able to advise you on how to improve your internal systems and processes so that their value to you extends beyond debt collection and into the realm of credit management advice.

The aim of debt collection should always be to try to collect a debt as quickly and cost effectively as possible. This ability is affected to some extent by how quickly you have referred the debt for collection and what documentation and records you have retained to prove each element of the debt that was incurred. For example, how will you prove the goods or services were ordered and delivered, and what was the agreement for payment? This comes back to your internal procedures and the need to make sure they are watertight and simple to follow by all relevant staff.

So while the debt climate may be heating up, you can stay cool by being prepared to meet the challenge head on. For further information contact:

For further information contact:

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