Every business owner knows that getting paid by your customers is not easy. Imagine this scenario…
A major customer of yours goes broke. You are left with a heap of money outstanding and all those months of gently chasing them for payment have been completely WASTED.
The consequences include major cashflow issues and potential payment defaults of your own. Now others are relying upon you for getting paid.
You are now seriously concerned about your ability to pay your own creditors. Just to rub salt into the wound, the liquidator of your major customer is claiming that payments you received in the previous 6 months are preferences – you are being asked to repay these amounts!
Your suppliers and subcontractors will ensure they are getting paid…
Creditors you have personally guaranteed may now start to call on that guarantee. Your business might not be able to survive. What’s more, despite being a director you may be held personally liable for several items. You are faced with personal insolvency and your family home is now at risk.
It is the stuff of nightmares.
When we have spoken to clients who have fallen victims to these situations, they usually admit:
- I had a feeling this might have been coming for some time now…
- I wish I had been tougher when asking for payment earlier on…
If your customer is facing financial distress, there will often be excuses, empty promises, slow or delayed payments, and/or invoice part payments (for example, 50% of the amount due or a ’round sum’ payment of $2,000 or $5,000 and the promise of the balance being paid in due course). Round sum payments, which can’t be matched to specific invoices, was used as an indicator of insolvency in an infamous court case where insolvency was determined (ASIC vs Plymin & Ors 2003).
This is normally enough to keep suppliers and subcontractors content enough to keep working or supplying. However, the amount owed overall gets bigger and bigger…
Too little, too late – take back control…
All too often, subcontractors only become afraid and stop work once they realise that they will never get the balance of money owed to them. To take back control, it’s important to recognise the warning signs early and:
- Just cease work. Don’t seek to please a customer who is not paying you. Wait for payment.
- On short notice advise the client that can’t work due to cashflow. A powerful and useful tool. Be brazen.
- Seek alternate work and reduce the number of work hours working for the customer deliberately. Hedge your bets.
- Instruct a debt collector (a little bit of good cop, bad cop – just blame your accountant for this…).
History favours the brave in these situations. Those who stand up for their rights usually always get paid first.
Won a major customer?
It’s exciting to pick up new work. It’s still important, however, to make sure that you will get paid for your goods and/or services. In the case of your customer entering liquidation, you will rank at the very bottom (unless you register a security interest on the PPSR). Any available funds in the liquidation (after assets have been realised) will be first used to pay your customer’s employees and then any other banks and financiers (in priority to you). Even the liquidator gets paid before the unsecured creditors (suppliers and subcontractors).
Here’s some useful information which should help you stay vigilant:
- Do a credit check on their business. Banks and finance companies do this, why wouldn’t you?
- Obtain advice about the PPSR and whether you can register a security interest.
- Get references or speak to industry bodies and trade associations. Do some research yourself on who you know that works with them.
- Tell them your payment terms right from the start. Set a credit limit that appropriates for your own business – ideally, this is an amount you can afford to lose in the worst-case scenario.
- Ensure they complete a credit application. If you don’t have one, get one drawn up by a lawyer.
- Bear in mind that your customer may have been placed on stop by one of your competitors. It’s worth asking why they want to change suppliers and use you instead.
- Make sure all communication is in writing, especially your payment terms. If they step outside of your payment terms, then simply advise them that you have to cease work.
It is important not to become complacent when you pick up a client. It might be an exciting time but you still have to follow all the processes. It is worth spending the time at the start to ensure everything is set up properly.
If you’re unsure how to set these things in motion for your business, speak with us. We can help you get your processes right each time you pick up a new client.