Nothing loses value faster than services already rendered. This is a bitter pill to swallow for many, yet it perfectly explains why bad debts remain a consistent problem for many businesses operating on credit terms. Statistics by the US Central Bureau found that 26% of invoices over three months old are uncollectable, and this figure increases to 90% when the invoices are 12 months old.
As we are coming up to the end of the year, it is common for businesses to examine their outstanding receivables as they close their books for the year. If bad debts are plaguing your business, here are some important steps you should take:
- Document everything and have good file management system. Legal cases and lawsuits are commonly won and lost on documentary evidence. In the event you decide to bite the bullet and appoint a debt recovery lawyer to commence legal action against a recalcitrant debtor, your lawyer will inevitable ask you for supporting documents for the debt. This usually includes things like invoices, statements of accounts, delivery orders, purchase orders, quotations and correspondence between the parties relating to the debt. Being able to produce the relevant transaction documents will strengthen your case that the debt is undisputed.
- Ask for payment. Some business owners are reluctant to ask their customers for payment for fear of offending the customer. However, requests for payment can always be done tactfully and a business owner will have to weigh the importance of keeping a customer happy against collecting its outstanding payment. In any event, requests and reminders for payment are useful evidence that can support a debt recovery action later. Emails and other correspondence with the debtor (including Whatsapp, text messages etc) should be saved somewhere so they can easily be retrieved later. Verbal discussions and meetings with the debtor should be minuted and sent to the debtor so there is minimal dispute later about what was discussed.
- Be realistic. A debt may be difficult to recover because the debtor just does not have enough money to make payment. Sometimes, negotiating a reasonable installment payment or settlement arrangement can be considered as opposed to an “all or nothing” approach. Remember – if the debtor is literally broke, your money will not magically appear in your bank account just because you have a court judgment in your favour. Always consult your lawyer regarding the options available to you as not all debt cases need to (or should) end up in court.
- Have a budget. Sometimes, you have to spend money to recover money. While it may seem unfair that you would have to incur additional costs to recover something which is owing to you, this is a commercial reality. Setting aside a budget for costs that might be incurred in the recovery of the debt will help manage your expectations, and will also assist with your commercial cost-benefit analysis in weighing whether or not to pursue a bad debt. Your lawyer will also be grateful.
ABOUT THE AUTHOR. This article was written by Donovan Cheah. Donovan Cheah is a partner at Donovan & Ho. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Edge, The Star, the American Chamber of Commerce updates, and Asialaw.
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