Common Mistakes Business’s Make When Extending Credit

It’s that time of year again when things get a little crazy! Your sales start going through the roof, your workload gets heavier and yes, lets face it, it’s easy to let the important task of chasing slow paying debtors and managing your accounts receivables slip through your fingers.

No matter what industry your in, collecting money from slow paying debtors is a battle for many business owners. Bad debts account to 2-3% of most business, in many of those cases this statistic could of been reduced by effective debt collection procedures. Reducing this percentage increases net profit to a much greater percentage so management of debtors has real value. Better management of slow paying debtors will also improve cash flow and lower the cost of services provided.

No matter how many times I tell my customers, “the faster you find them, interview them, the faster you will collect the debt”, too many business wait to long to take action. You should have a (30/60/90 day) procedure in place to deal with slow paying debtors before situations arise. Ask yourself this. How many debtors have relocated or gone belly up in the last year? Could you have prevented the losses to your business? Many cases can be prevented with effective accounts receivable procedures in place, by up to 80%.

Seven helpful tips you can use when dealing with slow payers:
1. Always have your agreement in writing – ensure your terms are clearly stipulated on any business documents, such as your Credit application and Terms of Trade. These terms should be duplicated on your invoices.

2. Have your debtor sign in acknowledgment that your services have been engaged, or services and/or products have satisfactorilybeen received.

3. Ensure you have adequate accounts receivable policies in place to deal with slow paying debtors.

4. Outsource the accounts receivables role to someone other than yourself. Having a third party such as a collection agency or a dedicated accounts receivables person is invaluable and will let your debtor know you mean business.

5. Know who you are dealing with before extending extending credit. Don’t be afraid to perform credit checks before
commencing dealings with a new customer.

6. Place the debtor on a Cash Only (COD) basis for the first 3 transactions. That will help you evaluate how much credit to extend when granting them an account for credit.

7. If the debt falls into default and an initial payment arrangement is made, extend the courtesy of only amending or extending the payment arrangement on one (1) occasion. If they default on that arrangement its time to pass it onto a professional debt collection agency.

Who is making a claim?

This section will tell you who can file a claim and against whom they can file under the security of payments laws.

• The contractor can file a claim against the principals or developers
• The subcontractor can file a claim against contractors
• The Supplier can file a claim against customers
• The Plant and equipment hirer can file a claim against clients
• The consultant can file a claim against clients

Note: If a homeowner who is going to live in or plans on living in the home where the work is being conducted, then you cannot put a claim against them under the new laws.

What can be claimed for under the new laws?

You can put a claim in for the following:

• You can claim for the construction work that’s done.
• You can claim for construction material or the plant you that you have provided or hired to do the work.
• You can claim for the interest on overdue progress payments,
• You can claim on your losses and the additional expenses incurred due to the work being taken out of your contract while you legally suspended work under the new laws.
• You can claim on the cash security and money used for retention purposes.
• You can claim at the very end of the contract, and be made for the final payment, under the Act.

Under these laws, progress claims can be made, and you can receive the progress payment. When a contract does not make adequate provision, there is an implied right given to be able to make progress claims? You can seek payment for any unpaid money by adjudication, when you make a claim.

What does adjudication mean?

Under the new laws, this process was set up for an independent adjudicator to come and decide what amount will be paid. This is a quick way to get a decision and is a way to keep from going to court. The decision by the adjudicator can be enforced as a judgment.

What do I have to do for the first step?

Once you are able to make a progress claim, you can give the payment claim to the respondent (client/ principal). Here are the steps:

• You claim must be made by the time that is stated by your contract. If no time has been stated, then it needs to be by the end of the month.
• The claim has to be in writing, and it must be addressed to the respondent.
• The claim must describe the construction work that was done, must describe the related goods and related services which will be included in the claim.
• The claim must tell the amount that you say is due.
• The claim must include the words:  “This is a payment claim under the Building and Construction Industry (Security of Payment) Act 2009 (ACT).

When you are making a claim:

• You must come up with a reference date for making the claim
• You must Figure out what you are going to be to be paid, calculating it to the reference date.
• You must make a written payment claim on or after each reference date and that is to be served to the respondent and it should be in the form of a tax invoice.
• You must be able to deliver, post, or fax the claim to the respondent or by using another specified service that was mentioned in the contract.
• You must keep a record of the date of service and the date the respondent receives the claim.

What will happen next?

One of three things will take place once the respondent receives your payment claim:

1. The respondent will either pay the exact amount you have claimed against him or
2. The respondent will write up a payment schedule and send that to you.

Once the respondent has received your claim, they have 10 business days to send you a written statement of the amount they are willing to pay or with the reason they are unwilling to pay the difference also known as the payment schedule. The scheduled amount is the amount the respondent is prepared to pay.

Once you are given a payment schedule one of three things will happen:

1. The scheduled amount that the respondent has stated in the payment schedule can be accepted or
2. In a court of competent jurisdiction, the claimant can recover the unpaid amount as a debt due to them.
3. To be able to apply for adjudication, it must be in writing to the Authorized Nomination Authority (ANA). Once the claimant has received the payment schedule, the application must be turned in within 10 business days.

Once the adjudication begins, the respondent is limited from rising any defines that was not set out in the payment schedule. When the respondent gives you a payment schedule with the amount they are prepared to pay, then that amount must be paid by the date which the payment relates. When they don’t you can:

1. Give notice to the respondent by suspending the work (this notice must state that it is made under the Building and Constructions Industry Security of Payment Act) and
2. Proceed with court proceedings to recover the full amount claimed by you or go to adjudication.

The respondent cannot bring a cross claim against you if the respondent does not pay the scheduled amount. They also cannot raise any defines in any court proceedings that may arise due to them not paying. This does not apply in an adjudication proceeding.

1. If the respondent does not give you a payment schedule or fails to make payment in full

Once you have sent the respondent your written claim, they have 10 business days to pay the payment, if they fail to do so you can suspend the works after you have given the respondent notice and you will have the ability to hold on to all the unfixed plant  and materials supplied by you.

You can also start court proceedings to recover the unpaid amount or let an adjudicator handle the proceedings.

The respondent is not allowed to bring a cross claim against you if they have not paid the bill. They also may not rise define in a court proceeding that you bring against them. This will not apply to adjudication proceedings.

When there is no payment schedule, you have to notify the respondent that you are going to apply for adjudication, and they have 5 days to get you a payment schedule. If the respondent fails to comply, you can then apply for adjudication.

Note: Keep all written notices

All written notices that were sent or received must be kept. You can also include a facsimile and confirmation reports, and all registered mail receipts as well as the original notice sent to the respondent.

What will happen if the respondent fails to pay the adjudicated amount?

You should ask the person who appointed the adjudicator to give you an adjudication certificate. That should be filed in the appropriate court as a judgment. The certificate must accompany an affidavit stating that the adjudicated amount is still outstanding.