In this interview with business lawyer Damin Murdock, we discuss measures you can take early on to organise your cashflow and get paid. Keep reading to find out about receiving prompt and correct
Key points
- There are a number of things you can do to ensure you get paid
- These include ensuring your customers sign contracts and using a credit watch list
- It’s also worthwhile to understand how the legal debt recovery process works
Introduction
Cashflow is the lifeblood of small business. One unpaid debt can have disastrous consequences and severely impact your profitability. So how do you effectively, and if need be legally, chase a bad debt? Debt recovery specialist Damin Murdock says there’s a number of ways to prepare for, and pursue, a debt. Preparation is really crucial and there’s a number of ways to cover your business to stop getting into relationships with bad debtors.
1. Use a credit watch provider
“I don’t think it’s unreasonable to consider everyone you send an invoice to is at risk of not paying you. Therefore, it’s cheap insurance for you to put into your contracts and on your tax invoices that you use credit watch service providers,” Damin said. “This shows the recipient that you’ve already used a service that monitors bad debtors, and if you don’t get paid on time, they may end up on it. Good businesses rely on their reputations, so being a bad debtor (or having a reputation as one) can have serious consequences – a gentle reminder not to become one of these never hurts.”
2. Use a clear and legally-binding contract
“Have a clear contract that lays out the payment terms. Where possible, you can also ask for an upfront payment so you have some sort of commitment from the customer prior to delivering the goods or services. Many service providers do this in the form of charging an upfront 50% deposit. It’s also smart to conduct appropriate research on your customers – I recommend my clients conduct basic web searches first as this may uncover some nasty facts about a potential customer. I also refer my clients to several credit reporting agents who can prepare comprehensive credit checks both across Australia and worldwide. By conducting proper searches before doing business, this may save you from a lot of cashflow issues, credit interest charges and legal fees later on.
Make sure both parties sign your contract. It is all too often that I have to file legal proceedings based on verbal contracts and facts and circumstances. Not only does this result in higher legal fees, it also results in more risk because ultimately, you will be relying on your testimony or your employee’s testimony in Court.
3. Send your invoices out quickly
“Bill upfront or on very short terms to limit the risk and get paid. When my clients have a new customer, I tell them to bill within the first 30 days. You should also make sure the payment terms are 7 days. If you don’t get paid for your first invoice, immediately cease work and follow up with the invoice. In light of cashflow being so important, some clients offer discounts for early or upfront payment. Know when to stop providing goods and services to poor payers. After you have been in business for a while, you’ll become familiar with every excuse in the book. If your customer is waiting on “the big sale” to pay you, it may mean your customer has been waiting on “the big sale” for many years. Accordingly, they might ultimately be a time waster. But what happens when a customer or client just simply refuses to pay? What can you do after your terms have well and truly expired?
Legal options
Letter of demand
The path for legal debt recovery begins with a letter of demand which serves two purposes. It lets the debtor know you intend to start legal proceedings if they do not pay. It also includes all the relevant information relating to the debt. This is important because if legal action does take place, this becomes evidence of your attempt to recover your debt. It will also increase your chances of recovering your legal costs against the defendant. If the debtor still refuses to pay, you can then look at formal legal action.
Commencing legal proceedings
The first step is to issue legal proceedings in court or file an application with your local tribunal. Often, claims in tribunals or in the lower courts are “no cost jurisdictions”. Therefore lawyers may not be allowed to act or legal fees may not be recoverable if you win. The tribunals and lower courts will also have guides to provide assistance to those who do not have legal representation.
Hiring your lawyer
“If your claim is for more than $10,000, I recommend my clients engage a lawyer to help draft the claim. They can also act for them for the entire matter. You may be able to negotiate with a lawyer on a fixed price basis for small claims. This will give you a better understanding of whether it is worth hiring a lawyer or not. Once you issue your claim, the claim will have to be served on the defendant and they then generally have 21 to 28 days to file their defence. If there is no defence filed within the appropriate time, you may be able to file for a default judgment immediately, receive a judgment in your favour and get paid.
If a defence is filed, you will them be asked to attend court or the tribunal and arrange step-by-step procedures leading up to a file hearing. This includes processes such as exchanging documents and filing evidence;
After the procedural steps are finished, you have a hearing. If you win at hearing, you get a judgment which you can enforce, however, sometimes the enforcement procedures can be more costly and time consuming than the original legal proceedings.
Enforcing payment
Enforcement proceedings includes calling the defendant to court to find out about what assets and liabilities they own; issuing a writ of levy over their personal assets such as their motor vehicle; issuing a writ of possession to force the sale of a home; making an application to wind-up and liquidate a company; or issuing a bankruptcy notice so that a trustee in bankruptcy is appointed. At the end of the day, even if you obtain a favourable judgment, enforcing that judgment can take a long time and the debtor may be able to file an application to pay in instalments.
“If the debtor is deemed to have the ability to pay the judgment debt, then you’ll get paid eventually, but the time and effort involved for small amounts can be counterproductive and even end up costing you money. It’s far better to be prepared, do the research and act early to help prevent slow payers become non-payers,” Damin said.
