As a business owner or manager, you must always be aware of the risk of potential bankruptcy or insolvency of your customers, which would greatly affect your business and cashflow. How do you mitigate the risk of taking up customers who might eventually be unable to pay their debts? Here are a few pointers that you might find useful to help you avoid this unwanted situation.
1. Don’t forget – Background checks
One might think that this is a no-brainer. But when one is in a hurry to secure a good sale, one might miss out this step before signing the contract. Simple information like understanding their business, their trading history and also the key people in their business would be very useful in determining their business health. Forbes Magazine had reported that, their survey showed two thirds of accountants confiding that their clients did not thoroughly run a background check on their customers prior to entering into supply agreements. Consequently, some creditors were unfortunately caught by surprise when a customer is unable to pay for goods and services.
Australian Securities and Investments Commission (ASIC) is a good resource to run a company check. Searches on business and individual names can unearth the list of assets under them, which can help you decide on whether to take up personal guarantees from directors. On the other hand, you can also search via Personal Property Securities Register to ascertain other stakeholders of your customers’ assets. Via Credit Reference Association, you can find out if the customer had had problems in meeting obligations towards their suppliers before.
Any adverse information would be a good warning against accepting a potentially bad customer, helping you to manage the risk of customers defaulting.
2. Ensure stricter provisions in contracts
When entering into a contract, consider including terms specifying that the title for goods remains yours until the customer has paid for them in full. With this provision, you as a creditor are entitled to repossess your goods if your customer becomes insolvent before fully paying off for the products.
You might also include detailed provisions that limit any extensions/changes to payment terms to avoid any uncertainties in the event of insolvency. In cases of late payments, you might want to consider mitigations to be practised in the future to avoid repetition, or worse still, to avoid becoming a creditor of an insolvent customer. This is where your background check information can also be useful. For example, if you find yourself engaging a customer who had had problems in their historical payments, you should consider negotiating a provision to demand for full payment on delivery or agree on a shorter trading term.
3. Register your interest in supply
To protect your rights over other suppliers, you should consider registering your interests on the Personal Property Securities Register (PPSR). This is to ensure that, should your client become insolvent, the administrator/liquidator is able to set aside your supplies for you, instead of other creditors. Make sure that you register accurately every detail on the PPSR to ensure the enforceability.
4. Accurate books and records is a must
This goes without saying. Without adequate records as proofs, you can’t enforce your rights. From written contracts, verbal communications to any claims made by customers, you should keep all of them in your files as who knows, one day, you might find them useful in putting forward your claims over an insolvent debtor.
5. Go and get ‘good’ customers
We can never stress enough the importance of reliable customers. They provide you with a win-win situation. You provide them with goods, they keep your business running, or even better, growing. They are definitely customers you should hold on to by maintaining a good relationship.