How Important Are Your Terms When Offering Credit and Collecting Debt?
Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia. This week, I am going to talk about how important your terms are when offering credit and collecting debt.
On-charge your Debt Collection Fees to Your Customer
Many of our clients don’t realise that you can actually on charge your debt collection fees to your customer, so long as it’s in your terms. This effectively makes the outsourcing of debt collection a completely free service. This is just one of the many benefits of having your terms reviewed by a debt collection professional.
Businesses of all sizes in Australia today grant credit of some sort. It’s the way business works today and in some cases, if you don’t provide credit, you won’t get that customer. Granting credit is actually a way of making an investment in your new client. It’s a good thing, so long as you have strict terms, in case of default.
Before you get to this step however, you will first need to assess which of your clients is actually worthy of your extension of credit.
What Makes a Good Credit Policy?
When an organization works on a cost and benefit analysis and makes an important decision of extending credit to their customers, then it would be vital for the company to establish strong procedures for collecting accounts and credit. An effective credit policy would normally be made up of three different parts:
- Credit Analysis- A company would have to determine how they will provide credit to other businesses under the credit analysis. They would use various methods such as credit scoring, evaluating the credibility of the business and getting credit reports.
- Terms of the Sale- These terms for credit clients would state how the company will sell its services and products. Would the company provide credit or only make cash sales? This decision would be made through credit analysis process and the company would then determine which client can be given credit. If the company decides on extending credit to another firm, then the next step would be to establish various terms. The terms may include a discount that you want to provide the client or a cheaper price if paid by a certain day.
- Collection Policy- This is what we specialise in. Writing proper terms so that you can get all your costs back, on top of the outstanding invoice. So it’s not enough to just have your terms, you will also have to design a collections policy which can be used for monitoring the credit accounts. In most cases, two approaches are used by companies. They may use the aging schedule for accounts receivable or an average collection period (ACP).
The ACP or average collection period allows the company to know the average number of days it would take for collecting the credit accounts. This ACP can be compared to other companies in the industry as well as the ACP from earlier years. This will provide the company with a large amount of useful data to work on. When the ACP rises, the company would have to resort to outsourcing to a debt collection agency.
The aging schedule for accounts receivable is also a very valuable tool. This tool will allow the business to see the percentage of the credit accounts that are late, the delinquent accounts which are now considered uncollectible and more. Between both of these tools, it would be quite easy for a company to understand and maintain control over its credit accounts while taking care of problems which could affect the cash flow of the business.
Terms of Trade
Establishing clear and effective Terms of Trade is very important since it will ensure that your business operates smoothly. These terms will ensure that your money would be available to you when you need it. It will also establish a transparent relationship with the firms you deal with and allow you to collect your debts in an effective and straightforward manner.
Documentation for Terms of Trade
It is very important to have effective and clear Terms of Trade with the firms that you deal with throughout your relationship. Companies that do not have it correctly worded and in place would be at a major disadvantage. Effective Terms of Trade would ensure that you would be paid on a timely basis.
Since every company is different, it would be important to tailor your Terms of Trade to ensure that it suits your business. Having documentation supporting your credit policy and created by qualified and experienced legal practitioners in Australia would be important. The documentation must include all the specific information that would be needed by your business. Our legal arm, ADC Legal Litigation Lawyers, can help with this.
As stated earlier, one of the terms you can add in is about the recovery or debt collection and/or legal fees. So long as your customer is made aware of this term clearly, from the start, your debt collection agency can then on-charge their collection fee to your customer.
If you would still prefer to talk to a debt collection agency to help you on your debt collection concerns, email me at firstname.lastname@example.org or call 1300 799 511. You may also Skype me at debtrecoveries.