The majority of small business owners know which invoice is causing them the problem. However, only very few of them have performed the entire analysis, which would include the amount of internal labour required to get it back, the delay in the payment from the supplier while waiting for it, the use of an available line of credit to fill the void, and the loss of an hour of the staff’s time that could be used to generate some income instead. The outstanding balance is a key number. The lost productivity is greater in many cases.
As evidenced by the insolvency data reported by ASIC for the 2024-2025 financial year, cash flow and financial management issues are among the most commonly mentioned reasons for external administration appointments of Australian firms. Unpaid receivables often stand behind these cash flow issues. Debt recovery in a company is not just a matter of collecting the money but getting rid of the risk of further complications.
When an Overdue Invoice Becomes a Major Cash Flow Stress?
A single overdue invoice is a bit of a pain, but a pattern of overdue invoices from different folks is where things start to get serious it’s a cash flow crisis waiting to happen. See, the way these things compound: when one big debtor puts payment off, you find yourself having to dip into your own reserves or go to your credit line to cover your own bills. That cuts into your buffer just when the next delay comes along. By the time you’re juggling payments with three or four different debtors who are all running late, you’re basically having to run your business on the assumption of how other people are going to behave rather than what your own business needs are.
The problem is, it’s not always clear right off the bat whether someone’s just going to be a bit late paying, or whether they never actually intend to pay up. Early on both types of debtors tend to behave in roughly the same way: you get all these reassuring messages, some token payments, and slowly start to hear less from them. But usually by the 60 to 90 day mark you start to get a clearer picture: that’s when the chances of pulling the whole thing back together without outside help start to really fall off a cliff.
- 30-day overdue accounts are pretty easy to deal with, and usually you can nail them down with some internal follow-up without causing any lasting damage.
- 60-day accounts start to be a worry; this is when you’re usually going to start to notice that the debtor is starting to avoid paying up, and that’s when your chances of getting your money back start to slip.
- 90+ days is when things get really grim. At this point you pretty much need to try a different approach, because waiting longer is just not going to get you anywhere.
What Corporate Debt Collection Actually Looks Like in Practice?
The way the public thinks debt collection works all aggressive phone calls and implied threats is just completely at odds with how professional corporate debt collection actually works. The reality is that it’s a step-by-step process, document-driven, and governed by specific guidelines that are jointly published by ASIC and the ACCC that lay out exactly what collectors can and can’t say (or do) to debtors.
A professional debt collection process usually starts with a formal demand letter: this lays out what the money is and when it’s due in clear black and white. If that doesn’t get you anywhere, then things tend to move on to negotiations payment plans, settlements at a reduced amount, or just getting the debtor to acknowledge the debt with some agreed terms. It’s only when all that fails (or when the debtor refuses) that you kick it up to the lawyers and start the threat of going to court. Even then, a lot of the time that’s enough to get the debtor to pay up even if they were previously uncooperative.
- According to the ASIC/ACCC Debt Collection Guidelines, there are all sorts of things that you’re not allowed to do: things like making false promises, or contacting the debtor too many times, or any of the other “aggressive” tactics that you see in the movies.
- Collections law firms and collection agencies are not interchangeable: the former can take proceedings all the way to court, but the latter usually can’t do anything without a referral.
- At the end of the day, it’s the quality of the documentation that pretty much determines what options you’ve got for getting your money back; having signed contracts, delivery receipts, and all the rest is what really gives you any chance of success.
Protecting the Business Relationship Without Sacrificing the Debt
At the heart of commercial debt recovery lies a prickly problem: the debtor can also be a valued client that you don’t want to lose. Chasing the debt directly, either through your own staff or management, is bound to put the relationship on rocky ground. The tension between the two businesses tends to linger long after the dispute’s been settled, impacting future business dealings even if the debt is eventually paid.
Getting a third-party agency in to collect on your behalf takes the heat out of the situation. They handle the awkward process of getting paid without you having to be there to deal with it face-to-face. These agencies communicate in a way and at a speed that’s governed by the ACCC standards, so you don’t have to worry about being accused of doing anything shady.
- They have to identify themselves as working on your behalf, and not try to pass themselves off as the real deal.
- Removing the confrontational aspect of the debt recovery process can really help get the debtor to engage and be more willing to sort things out.
- Agreements reached through a third party are often more solid and enforceable than the ones you’d hammer out directly with the debtor.
The Legal Pathway: When to Take It and Why
Going to court is not the automatic end of the road when it comes to debt recovery, but it’s a perfectly valid and sometimes pretty effective step. If you’re dealing with a smaller debt, you might be able to get it resolved in a Small Claims Tribunal with relatively low costs and easy procedures. If the debt’s bigger, you might need to head to the State Supreme Court or even the Federal Court, depending on what you’re claiming.
When does it make sense to take the legal path? That depends on a few things the size of the debt, how likely it is that you’ll get paid, and whether the debtor’s got assets that you can use to get the money. In a lot of cases, serving them with a notice of proceedings will be enough to get them to cough up especially if they’ve got assets or ongoing business relationships that a public judgment would mess with.
- the clock is ticking most states have a 6-year time limit on chasing debts, after which you’re out of luck.
- if you win, you can usually get the other side to pay your costs; in smaller claims, there might be a cap on the costs you can recover.
- once you’ve got a judgment, trying to enforce it like seizing property or freezing their bank accounts is a whole different process.
Credit Policy: Your First Line of Defence Against Bad Debt
Of course, the best debt recovery outcome is the one that never happens in the first place. Having good credit policies, personal guarantees and doing your research before lending money can all help reduce the risk of ending up with a big old’ hole in your finances. On the other hand, if you lend money without getting the debtor to sign on the dotted line, or without clear terms and conditions, or even without actually documenting what you did for them, then you’re going to have a much harder time getting your money back if they don’t pay up.
- when you let someone credit, make sure they’ve filled out a proper application form and included their business name and ABN and if possible, get a personal guarantee from one of their directors.
- if you’re lending out plant, equipment or inventory, PPSR registration is worth considering.
- a good commercial collections agency will not only help you recover debts that have gone bad, but can also advise you on how to improve your credit policies to prevent it from happening in the first place.
