Chapter 2:How to avoid problems - cheaply

How to avoid problems - cheaply

First, check them out

IT IS ridiculous for anyone smart enough to be in business not to make routine credit checks. There is no point chasing a debtor with a summons if there's nothing there. You'll get plenty of 'legal action' -- but you'll pay for it all yourself. The debtor won't be touched.

Look under 'Credit Reporting Services' in the Yellow Pages. Call a couple of these services. Get their literature. Then join one. You pay an annual subscription (in the very low hundreds) and a small fee each time you want to find out about someone (whether a person, or a business). And I do mean a small fee: less than $10, usually.

On an individual, you can get information like this:*

• Driving license number and date of birth.
• Name of employer, and previous employer.
• His address, address before that, and before that.
• Companies he is a director of, and former companies.
• Credit services, banks etc. that have been enquiring about him, and when.
• Any writs and summonses served, and whether he has had any court judgments against him.
• Default information, including written-off accounts and accounts referred to a collection agency.
• Which mercantile agents have made enquiries about the person.

* At least in August, 1990, when I'm writing this. The Privacy Amendment Bill is still smouldering in Federal Parliament. If it ever passes in the form it's in, this might change the sort of credit information you can lay your hands on. But I don't believe a strong form of the Bill will last long. Businesses need information on people who apply for credit. They will get the information somehow. If businesses can't do credit checks through someone like CRAA, then no doubt they'll find another lawful way. Find out how other businesses do it, then do it too.

On a company, you can get information like this:

• Trading address and registered office.
• Incorporation details, issued shares and paid capital.
• Details of directors.
• Writs and summonses served and outstanding court judgments.
• Default information, including written-off accounts and accounts referred to a collection agency.
• Which mercantile agents have made enquiries about the company.

So if someone who asks you for credit is in financial trouble, you'll know it before you start doing business. You can tell him: sure, send us the $6200 and you can have the (whatever it is). If he huffs and storms and threatens to take his business elsewhere, let him. Let one of your competitors have the loss.

Now I realise it's easy to say, "Keep your credit tight". I know the temptations. The sales staff are selling, selling. Maybe business isn't too good, and you really want this sale. But I repeat: the easy way to get difficult debtors to pay is never give them credit to start with. Money up front, or no sale.

But even if your credit checks are squeaky tight, you still won't avoid all problems. A debtor can 'go bad' for a hundred reasons. He can be a first-rate customer for years, then something slips. Instead of paying in 30 days, all of a sudden he drifts out to 45 or 60. Or maybe a cheque will bounce. Or something else that's not just quite normal. This should start to ring little bells. You should find out what the problem is. Use your credit reference agency. If that doesn't show any ominous signs, then phone the customer. You're entitled to find out what's happening -- you're providing the customer with credit.

The customer might say, "Accept things as they are, or we'll go somewhere else." That can put you in a quandary. Maybe he's spending $10,000 a month and it's an account you don't want to lose. But really, you might go for three months without getting paid. Maybe $30,000. And if he doesn't pay in the end, it means you might have to find $300,000 in new sales to make it up.

I urge you to get this credit checking right before you worry about the rest of the things in this book. You can stop reading right here, and do very well for yourself if you just do that. Better than many businesses, I can tell you.

Another suggestion: treat your sales and credit people as equals. Pay them the same, push them the same. Invite your credit manager to some of your sales meetings. If your credit manager has guts, he might say something like, "You bastards out there make the sales, but I can't get the money. Don't you eyeball them? Look, so and so is paying on 90 days now. Is he earning a quid? Or is he slow as hell out there, with no contracts? Is there lots of stock around? Let me know. You might try picking up a cheque too, next time you're there."

Then get it in writing

THE MORE you get in writing, the stronger your hand will be if the debtor goes bad. If you have to go to court, your case will be tight. (But usually, with lots of signed documents in your hands, you probably won't need to: the debtor will realise his position is too weak.)

I know this isn't a popular topic. All that paperwork hassle -- for what? It feels like driving with the brake on. But I wouldn't be doing you a favour if I didn't at least mention 'credit management' (the right term for a system for checking out your customers, and keeping all the documentation straight).

How much documentation you use -- and what sort -- depends on the size of your business, how much bad experience you've had with debtors, how much you know about credit management, how tolerant your customers are about signing papers (including directors guarantees), and a hundred other things. But whether you know it or not, you already have a credit management system: it might be good, or less good, or downright lousy -- but it's there.

You may be relieved to know that I'm not going to mention anything else about this topic. (As I said, I've found that people really don't like to hear about it.) But that doesn't let you off. If you get your credit management wrong, it will come back and thump you. If you get it right, you'll get your money almost every time. But to get it right, you may need help: if you feel shaky on all this, you can join the Australian Institute of Credit Management and let them help you.

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