The business environment is not just dynamic but also very tricky. And if there is one thing that everyone should know, it is that businesses do not go bankrupt because they fail to generate revenue, but because they run out of cash!
Credit Sales in Increasing debts
But that sounds impossible. How could a business that is generating revenue, be out of cash? Simply because most transactions in businesses take place on credit, rather than on cash. This would normally involve a small token payment upfront, with the major chunk to be paid later. This offer of credit is a must in business. In Canada alone, around 7000 businesses go bankrupt every year.
So, while a startup may already function on minimal capital, it may still have to offer credit to its customers. This is a major reason for such high debts and eventually to such a high rate of business failures due to cash shortage when businesses cannot recover their debts. In fact, according to statistics, around $5.8 billion were written off in bad debts only in 2015.
How To Recover the Debts
Of course, a business cannot ask every customer to always make complete payments upfront. They cannot, therefore, wholly eradicate the issue of debts. Therefore, in such an environment, businesses need to learn how to recover their debts effectively. How to do that as a business? Here is how:
1. Discuss Details Upfront
One of the most recurring disputes in debt recovery is the details. Debtors may fail to recognize or acknowledge the details that were set at the time the debt was taken. Of course, this does not relate to huge organizational loans that are agreed upon in paper, but everyday expenses that are deferred for later payment with no documentation.
So, the most important point in ensuring effective debt recovery or avoiding debt defaults is to ensure that every minute detail is clarified at the first interaction.
2. Debt Collection Agencies
Given that collecting everyday debts can be a huge hassle for organizations, many tend to outsource their debt collection efforts to debt collection agencies. These are organizations that undertake your debt management services and ensure effective recovery. Statistics by Callminer suggest that around 37.9% of total healthcare debts are handled by debt collection agencies.
Debt collection agencies can operate in two major ways, or you could say they offer a business two types of services:
- Selling the debt: a business would sometimes sell an entire debt to the collection agency. This will happen after the business has deemed the debt irrecoverable and hence will settle for a lump sum payment less than what is originally owed. The agency would offer this amount, legally become the creditor for your debt and then try to recover the original amount for their own selves.
- Work as a channel: sometimes they might simply work as channels. The business will own the debt but may want the recovery agency to contact the debtor on their behalf and recover the debt.
However, it must also be made clear that these agencies may not be the best option for startups owing to such small setups and informal business models. That is why they are used by medium to large organizations.
3. Monitoring Debt Aging Schedules
Businesses, in order to ensure that they can recover debt, should always make use of effective debt aging schedules. These are schedules that rank debts based on the time they have been due for. The basic premise of such a schedule is that the longer a debt has been due, the lesser the probability of it being recovered.
Furthermore, a debt aging schedule is also used to manage the customer relationships of an organization. The ranks that it assigns its debtors dictate the kinds of policies and dealings with debtors. Say, a debt that is owed only for the last two days, will not need any reminders as opposed to a debt that was owed for a month.
4. Help from the Law
The court of law is always a place of hope for any organization looking to deal with a defaulter. Sometimes, as little effort as sending a solicitor letter might do the trick. This might be because a debtor may not really have the resources to engage in legal action against them or know that the court might impose additional fines.
However, if the defaulter continues to be a problem, the only course of action is high court enforcement. When presented with all the arguments and relevant documentation, it is highly probable that the debtor is forced to pay.
Although some might believe that help from the law is not for small startups, the fact of the matter is that consultation can be received even for free at times.
5. Negotiations and Interest
Given that a debtor can be made to sit down with your business representatives, working out new terms of a debt may also be possible. When businesses do that, it might be called debt refinancing and is relatively common. However, what a business must remember is that if they are not paid on time, they deserve compensation for all opportunities lost in the absence of that money.
Therefore, in cases of negotiations, the business must always push for this compensation. The compensation may be enforced in terms of interest payments for late payment and may be made progressive for additional time that the delivery is delayed.
In essence, a business might have several opportunities to effectively recover their debts. However, what a business must always remember is that customer relationship today are their most valuable asset. Therefore, they must always be willing to facilitate debtors and customers and always leave the worst for the last.
This also means that a business will often have to forego some debts. Normal accounting concepts would require a business to draw up provisions for expected defaults and use them as cushions when the actual default occurs. These losses then are simply normal business losses.