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The pains and pitfalls of hanging onto bad debts

Debt recovery is often a pain point for many Kiwi small businesses but it doesn't have to be!

24 May 2017

Debt recovery is often a pain point for many Kiwi small businesses.  The good news is that many businesses are becoming savvier through better credit control and technology, which has resulted in some pain reduction.  One notable trait remains, however.  Many are spending a huge amount of time running after bad debts, sometimes for years. 

The tendency to hang onto bad debts is understandable.  A bad debt can create a ‘fight-or-flight’ reaction since cash flow for a garage owner in Northland or a sparky in the Wairarapa represents food on the table.   But what are some pitfalls in running on emotion and spending a significant amount of time chasing up unpaid invoices?   

There are three of them. 

1.    The effort spent chasing up debt can only be achieved by giving up something else such as pursuing a new business opportunity.   

2.    The longer you chase a debt on your own, the lower the likelihood of getting a return since the customer may have changed their address, phone number or their financial health has deteriorated.  

3.    The customer can still successfully gain credit from other businesses potentially lowering your debt down the queue should they default. There are several basic strategies you can use to avoid some of the pains and pitfalls in chasing up debts for too long.  

Here are a few of them. 

1. Create your own credit control process 

To ensure you collect what’s owed efficiently it is essential to have some internal procedures for credit control.  At a bare minimum it’s important to clearly define whose job it is to follow up customers and when invoices, reminder letters and phone calls should be made.  By establishing timeframes and responsibilities you create clarity, including the next steps, should they not pay. 

2. Manage your emotions 

There are two key things to remember here.  Keeping cool means you are more likely to base decisions on facts not gut feelings.  Secondly, non-payment can be a result of misfortune.  Don’t be tempted to catastrophize and assume the worst.   

3. Seek advice early 

To get the best possible outcome it’s important you consider seeking advice from a debt resolution specialist as soon as your own credit control steps have been finished.  For example, if your final demand notices and phone calls go out 14 days after the invoice is due then as a rule of thumb the debt should be referred no later than day 30.       

4.   Employ a debt resolution specialist

Often businesses don’t engage a debt collection agency because they think that the process is too complex. In fact the process is quite pain free. 

For more information about Baycorp’s services for small businesses please call us on 0800 229 267 or click here