A fundamental component of running a successful business is risk management. When providing services or goods to a customer, there is always the risk that they will unexpectedly be unable to pay you according to your agreed trading terms or even leave your debt completely unpaid.

Protecting the interests of your business should be a high priority. The insolvency of a major debtor can severely impact your business and cash flow. Business owners and managers must consider the risks of defaulting debtors and develop strategies to mitigate them.

Background checks

In the haste and excitement of securing new sales, simple background checks are often neglected. A background check on a potential new customer may reveal some very pertinent information about their business or trading history. It may help to avert some nasty surprises when they are unable to pay for goods and services.

Background checks may include Australian Securities and Investments Commission company searches, business name searches and personal name searches into the proprietors and managers of the business. Do not overlook the importance of checking the history of key individuals involved in the customer’s business.

Searches at the Land Titles Office in the name of the customer and the proprietors will reveal property holdings which may provide comfort when taking personal guarantees from directors. A search of the Personal Property Securities Register will reveal other parties with interests in the customer’s business assets. Credit Reference Association checks will reveal whether the customer has had difficulty fulfilling obligations to suppliers in the past.

Saward Dawson would be pleased to help you with background checks as we understand that they might seem like a time consuming distraction when taking on a new customer.

Establishing contracts

The information gathered during your background checks can be useful when drafting a contract.

Contracts may include provisions for the execution of security agreements to ensure that the title for goods remains yours until the customer has paid for them in full. In doing so, should the customer become insolvent without paying for the goods, you are then able to repossess goods as necessary.

Various terms such as claims to extend or change payment terms should also be clearly detailed in your contracts. It will help to prevent any uncertainty in the event of insolvency.

Adverse findings from one or more of your background checks may require you to reconsider your position with the potential customer. It might not prevent you from doing business with them but you might consider your terms and conditions. If your prospective client has not fulfilled payment terms on previous contracts, you can use this information to justify a demand for full payment on delivery or shorter trading terms. Part payments in advance of providing the service may be another useful option.

Register your interest in supply

The Personal Properties Security Act helps business owners and individuals to have greater certainty over who has legal ownership of assets. This is particularly important where an asset has been sold on credit terms and where the vendor wishes to retain security over the asset.

Registering your interests on the Personal Property Securities Register (PPSR) may ensure that claims against your supply are enforceable and prioritised over other suppliers in case of defaulting on the debt. In the event of insolvency, without registration and supporting security documentation, an administrator or liquidator may be able to retain your supply for the benefit of all creditors, reducing your ability to recover a substantial proportion of the funds owed.

Keep accurate books and records

It is vital that you keep adequate, accurate and comprehensive records of all transactions, including written contracts, verbal communications and any claims made by customers. This will ensure that if a debtor does become insolvent, you will have evidence to support your claims, interests and rights regarding your supply.

If late payments do occur, actions should be considered to prevent this happening again; late payments can be a sign that your customer is experiencing financial difficulties.

Find “good” customers

We know that this is easier said than done. However, reliable customers are particularly important for ensuring growth and smooth trading. Maintaining a good relationship with these clients will help keep your business sustainable and strong.

Not all customers are going to be as reliable payers as others but this certainly does not mean that they are not “valued customers” all the same. Managing the risk associated with these customers need not be too time consuming. Done properly, it will help your business to remain on an even keel.