Commercial Debts Don’t Age Well!

Sometimes, there can be good reasons to allow some borrowers, clients or customers time to pay when there is financial hardship or while a dispute is being resolved.  In many more cases, we see the prospects of recovering money owed decrease dramatically as time passes. Whether they significantly impact cash flow or are just a frustrating and time-consuming line item in your business’s financial report, letting debts age rarely helps.

Time and time again, we have clients come to us having given a debtor time based on empty promises, out of sympathy, out of fear of losing their custom, after trying a debt collector for months, or having failed to prioritise recovering the debt. In a small number of cases that has helped a debtor trade their way to a better position to pay, but often it means a debtor has prioritised other payments, gone out of business, moved or created excuses for non-payment. This increases the cost of recovery and at the same time decreases the prospects of a successful outcome.

The better approach is to have clear payment terms and to hold borrowers and customers to them. Clear expectation and prompt enforcement of terms ensure a fair and robust way to manage risk and ensures accountability.

Commission-based debt recovery

There is a role for debt collectors who charge a commission only. If the debt is new, if the debt is small or if the debtor is likely to pay once followed up, these can be effective. If there is perceived value in following up a debt that is unlikely to be paid, they provide a low-cost way of doing so. Almost all will use automated, standard processes. As a result, the correspondence and phone scripts often lack detail and are best suited to debts that are easier to recover, such as where debtors need a reminder to pay or are slow payers who respond to some pressure from a third party.

Subscription-based debt recovery

Concerningly, there has been a significant increase in debt collectors charging a subscription for services with or without a commission on recovery. These should be treated with caution. For higher volume debt recovery where the fee is not tied to individual debt. These can be suitable and work much like commission-based services but with some cost along the way. Where the subscription is on a per-debt basis, this creates a conflict of interest, as the provider benefits more, the longer the debt is outstanding. Such arrangements may not be good value.

Using a lawyer for debt recovery

Using a lawyer for debt recovery is advisable when the debts are larger, a tailored approach is needed (eg: to preserve commercial relationships) or there is likely to be a dispute. Using a lawyer from the letter of demand stage should result in a tailored letter of demand, increasing the prospects of early payment. If the debt ends up being disputed or not paid after the initial demand, a lawyer who has already sent a detailed demand can progress the matter seamlessly to further action and will usually offer a range of options with accompanying advice. Using a lawyer adds additional impact and urgency to the debtor about your seriousness and determination to pursue the debt.

Prevention is cheaper than cure

Importantly, many lawyers will be able to identify ways to prevent future debts arising and can advise on improvements to commercial documents such as terms of trade, credit documents and loan agreements to ensure clear and enforceable obligations to pay going forward.

Decisive and prompt action to recover overdue payments and up-to-date commercial documents can be a great investment to protect cashflow, minimise disputes and reduce the administrative burden caused by debtors.

The start of the financial year is a great time to clean up outstanding debts and review commercial documents to protect precious cashflow.

Contact PCL Lawyers to learn how we can help your business with debt recovery.

About The Author - Roland Müller

Roland Müller is a Partner in our litigation practice area. He is a highly-experienced lawyer, an accredited specialist in commercial litigation and a nationally-accredited mediator. Equally...