When you enter into a credit transaction, you do so on a principle of good faith; the creditor effectively ‘lends’ goods or services to the debtor, who should have full intentions of meeting their debt.
Obviously, however, lending money carries a certain element of risk, and when receivables reach the stage where they are believed to be uncollectible, they are classed as bad debt.
Here are some measures you can take to avoid reaching this stage, and ensure you collect your receivables in full.
Objections and Excuses
The hardest line you will probably have to take is to reject an excuse or objection that attempts to explain why an amount has become overdue.
In some instances, individuals have made a career out of non-payment, and will always offer an excuse as to why the payment is late, or an objection that they claim renders the amount non-payable at all.
This is a chance for you to restore the amount owed to a payable state, by offering an alternative – perhaps payment in instalments, for instance.
Where a firm objection is put forward by the non-paying customer, the opportunity is to alter their perception of the situation so that they become aware that they still owe the full amount.
In some circumstances, a real ‘condition’ might arise that prevents payment – such as bankruptcy (either actual bankruptcy, or the imminent threat of it) or the foreclosure or merger of the company. In this latter situation, you may be able to demonstrate that your debt is still owed by the new owner or newly formed company.
You can investigate personal finances in order to determine the individual’s ability to pay, if they are claiming this as a condition of their non-payment.
Obtain a credit report to investigate their other financial transactions, and to verify any information they have directly provided to you – if they are being truthful, a flexible payment plan can help to recover some or all of the debt, while if they are lying, you can confront them and take any necessary action to force them to pay.
Professional debtors borrow money from multiple creditors, with the intention of not paying it back – which for some people has become a career, hence the term ‘professional’.
They typically have a slick communication style that helps to evade any polite requests for payment, but you may still be able to spot them using a credit check as part of your standard ‘new client’ procedure.
If you are following best practice, you should have obtained a signed copy of your terms and conditions, with stated deadlines for payments – and this will usually be binding for the debtor, if they have read, understood and accepted the terms as outlined.
Best Practice Rule of Thumb
Be specific in your terms, and combined with thorough background checks, you can not only take action on debtors, but can also deter professional debtors from attempting to scam you in the first place.
Be prompt in any action taken, to deter the debtor from thinking they may be able to get away with non-payment indefinitely.
Be firm on collection procedures, so that you do not come across as a light touch and, again, to deter professional debtors from the belief that you may be a creditor who is worth targeting.