While growing your business, it can become easy to lose sight of effectively managing your debtors. However, actively managing debtors helps your business continue to grow successfully.
The information below can make the task of controlling business debtors easier to manage.
As always, we recommend you seek legal advice if you have any concerns.
1. Have Terms of Trade in Place Before Extending Credit
Always put your terms of trade in writing before supplying goods or services. Many businesses still rely on informal arrangements, which increases the risk of unpaid debts. Written terms of trade reduce this risk and provide clarity if disputes arise.
It is also important to complete credit history and business reference checks before offering credit to new customers. Clearly set out your credit limits and payment terms in writing. Ensure the customer signs acceptance of your terms of trade before any supply occurs.
If you are unsure whether your terms of trade are adequate or enforceable, we recommend you seek legal advice from one of our experienced lawyers.
2. Know Who Owes the Money: Conduct an ASIC Search
You should always complete background checks before entering into a business relationship.
The only reliable way to confirm whether a business is in administration, liquidation or deregistered is by checking ASIC Registers. This helps you identify customers who may not have the ability to pay you and reduces commercial risk.
3. Letters of Demand and Statutory Demands
Letters of Demand
We recommend preparing a standard letter of demand template for your business. A letter of demand should include:
- accurate details of the debt;
- a clear statement that legal proceedings may commence if payment is not made by a specified date;
- copies of supporting documents.
The letter should always be signed, and a copy should be retained for your records. We recommend obtaining legal assistance to prepare a tailored template for your business.
Statutory Demands
You should also understand Section 459E of the Corporations Act 2001 (Cth), which governs statutory demands. A statutory demand is a formal request for payment of a debt owed by an insolvent company. The debt must meet the statutory minimum, currently $4,000 (this should always be confirmed before action is taken).
A statutory demand requires the debtor company to:
- pay the debt;
- secure or compromise the debt; or
- apply to set aside the demand.
The statutory demand must comply with prescribed legal requirements.
The debtor company has 21 days to comply. If it fails to do so, a presumption of insolvency arises. You can then apply to the Federal or Supreme Court to wind up the company.
Service requirements must also be strictly followed. A statutory demand can be served by leaving it at or posting it to the company’s registered office. It can also be delivered to a company director. Proper service is essential and must be proven by an Affidavit of Service.
Statutory demand procedures are complex. We strongly recommend legal advice to avoid the demand being set aside.
4. Educate Your Credit Control Team
All credit control staff must understand your business’s credit control policies and procedures. Regular meetings should be held to review and update these processes where necessary.
Staff must also clearly understand your terms of trade. Proper training reduces errors and prevents unnecessary debt recovery issues.
We also recommend engaging a credit control specialist to train staff or outsourcing debt recovery to a professional service.
5. Keep Records When Chasing Debts
If you are pursuing payment, you must keep detailed records of all communication, including phone calls, emails, letters of demand and supporting documents. This helps track the dispute and supports any future legal action.
Conclusion
The key to controlling business debtors is prevention. Clear written terms of trade and proper customer due diligence significantly reduce the risk of unpaid debts.
Ongoing staff training is also essential to ensure credit policies are followed correctly.
Even with strong debtor management systems, we recommend seeking advice from an experienced lawyer to ensure your processes are legally sound and effective.
If you or someone you know wants more information or needs help or advice, please contact us on 07 5576 9999 or email [email protected].
