Maintaining a healthy cash flow is the key to a successful business. Unfortunately, due to the economic impact of COVID-19, we are seeing an increasing number of businesses failing because cash flow cannot be sustained.
Not only are businesses still suffering reduced revenue from forced lock downs and trade restrictions, they are also feeling the pinch from the people. Increased unemployment rates, and the general vibe of uncertainty surrounding our livelihoods, means less spending by the consumer. The less cash there is flowing through our economy, the harder it is for a business to stay afloat.
In order to survive the COVID-19 economic crisis, it is crucial for business owners to closely manage the business’ finances, and most importantly, to implement a credit management plan.
A well thought out and executed credit management plan will ensure that your customer will prioritise their payments to your business. Consequently, securing your cash flow through this crazy Covid-19 ride!
So, what can you do to protect your money and secure your cash flow? In this blog, we are going to give you a few tips to assist you secure your money.
1. Terms of trade
Having well drafted terms of trade in place for your business is critical. Your terms of trade must clearly outline the scope of works, payment terms and consequences of default on payment. If your customer defaults on payment, your terms of trade should permit you to claim late payment interest and any costs incurred in recovering any outstanding amount from your customer. This means that provided you achieve payment, you will not be out of pocket for debt collection expenses.
The terms of trade should also provide you with an opportunity to obtain security over assets of your customer in the event that it/they cannot pay you. For example, you can include a charging clause which will allow you to register a caveat over real property which your customer may own. Alternatively, you may utilise the Personal Property Securities Register under the Personal Property Securities Act 2009 (Cth), if your terms of trade are drafted to allow you to do so.
In addition to the above, the terms of trade will also help to address uncertainty and misunderstandings between you and your customer and, in circumstances where there is a dispute, the terms of trade can include a provision which will not allow a customer to withhold payment from you as a result of that dispute. Rather, the dispute and settlement of the dispute will be dealt with separately.
Terms of trade act as contract between your business and your customer, which crystalise the acceptance by your customer when they are signed and agreed to by the customer. This acceptance must be before any service and / or product is provided to them.
2. Knowing the identity of your client and due diligence
Should you be required to enforce your terms of trade, you need to know who your customer is. It may sound simple, but you would be surprised how often this small detail is missed. This mistake usually occurs when the customer provides you with their trading name and nothing else.
A trading name is just that, it is the name a business trades under. If you are required to sue a business, you need to know the entity behind the trading name. Accordingly, you need to make sure you have identified the correct entity as your client and that the terms of trade are signed by that entity/person. The most common parties which you will contract with are companies, sole traders and partnerships. You may also find your customer is trading as a trust. If this is the case, it is important you find out who the trustee of the trust is because the trustee is the legal entity which you would be required to pursue through the Court if it became necessary.
To assist you in identifying the correct entity that is your client, you should always obtain an ABN and/or ACN from your customer. You can then check this on the Australian Government, Australian Business Register website https://abr.business.gov.au/
In addition to identifying your customer, it is important that you carry out due diligence checks before engaging with them. This is an important step to ensure you are aware of your customer’s credit worthiness and viability. You may carry out due diligence checks by making enquiries about your customer’s reputation with your industry partners, search Court Judgments and actions or even obtain a credit report.
3. Director’s Guarantee
In addition to your terms of trade, it is also beneficial to obtain a signed Director’s Guarantee from the Director and / or representative of your customer, if your customer is a company or a partnership.
The purpose of the Director’s Guarantee is to allow you to also be able to pursue the guarantor in his or her personal capacity as a well as your customer for amounts owed to you. It is almost like you have a ‘back up’ option to recover money when your customer cannot or does not pay you. The Director’s Guarantee is an effective tool to recover your debts, in particular, in circumstances where the customer becomes insolvent or has no assets.
4. Have efficient internal debt recovery procedures in place
Communication is key, so it is important to have consistent systems in place to regulate invoicing and remind debtors when invoices are overdue. If your customer is having money problems, it will prioritise payment to those who are actively pursuing them for payment. Accordingly, you must keep regular contact with your customer about overdue accounts and also, follow through on any threats you may make. This way they will know that you are serious about collecting your debt.
If your customer does raise an issue about the service and / or product that you have provided and refuses to pay any outstanding invoice, you need to promptly contact them and try to resolve the dispute. The longer the dispute goes on and you leave a debt outstanding, the harder it becomes to collect. If you cannot resolve the dispute with your customer, it is important to act quickly and seek legal advice.
In my next blog, I will discuss what happens when you have no option other than to pursue your customer through the Court in order to collect monies owed to you.
Should you or your business’ cash flow be suffering, please contact us at Clarke Hemmerling Lawyers on (08) 8333 2130 and let us help you with your credit management plan and / or debt recovery action. We can help you to get your business cashflow healthy again.
This Blog was written by Michelle Moore, Associate and Renee Hii, Solicitor at Clarke Hemmerling Lawyers.
This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.