The decision for a business to trade on credit terms carries risks which need to be properly assessed and mitigated at the outset.
The use of an effective and up-to-date Credit Application form and Terms and Conditions (T&Cs) are critical to minimising the risk of bad debts – however, there are also other simple checks which may point to increased credit risks.
General Risk Factors
You should consider and assess the following issues before deciding whether to proceed with a credit transaction:
- is the other party an existing customer of your business. If so, for how long?
- how was the other party referred to you?
- how long has the other party been trading? Is it a start-up or well established business? What is its payment history like? Has this deteriorated recently?
- is the other party a trustee company?
- is the other party domiciled in Australia or overseas? Where are its assets located? What are its assets?
- what industry sector is the other party is in? Is this an industry which is trading poorly or in structural decline?
- does the other party’s business have a stable revenue base – or does it generate revenue from being awarded irregular contracts?
- what is the size of the transaction relative to the size of your business? If you do not receive payment will this threaten the viability of your business?
- has the other party displayed recent adverse signs – for example the loss of key staff or adverse publicity?
Sourcing further information
More specific information on the other party can be sourced by:
- obtaining credit reports from one of the leading credit agencies operating in Australia ie Equifax (formerly Veda Advantage): www.equifax.com.au, Experian: www.experian.com.au or Dun and Bradstreet (D&B): www.dnb.com.au;
- an ASIC (Australian Securities and Investment Commission) search: www.asic.gov.au;
- a PPSR (Personal Property Securities Register) search: www.ppsr.gov.au;
- searching Court lists for current litigation or Court judgments:
- land title and lease searches (NSW Land Registry Services): www.nswlrs.com.au;
- bankruptcy searches (for an individual): www.afsa.gov.au;
- checking the other party’s web-site and social media sites (the absence of a web-site or recent social media activity could be a cause for concern);
- online reviews (check if the reviews are recent and whether there is a pattern of adverse reviews);
- speaking with trade referees and other existing customers and suppliers with recent trading experience with the other party.
Also essential to mitigating bad debts is having an effective and comprehensive Credit Application form which obtains as much information as possible in relation to:
- the financial position of the other party including, where appropriate, the provision of copies of financial statements, management accounts and bank statements;
- all current addresses, telephone numbers, email addresses and, where appropriate, photo identification of the other party and its director/s;
- names of trade referees and their contact details.
Together with the Credit Application form should be your Terms and Conditions which set the legal framework for the transaction. T&Cs should be comprehensive and, where appropriate, include provision for:
- directors guarantees;
- security (including PPSR compliance);
- suspension of supply and set-off clauses;
- jurisdiction clauses.
It is highly recommended that your Credit Application and T&Cs be reviewed regularly by a lawyer to deal with changes in the law and changes in the nature of your business and/or the product or service being supplied.
Expert legal advice can also be provided to ensure that the T&Cs will withstand legal challenge under the new “unfair contract laws” – which since November 2016 can apply in relation to business-to-business standard form contracts.
The risk of bad debtors is ever-present – however, from our experience, the risk can be reduced by:
- effective and targeted due diligence before entering into a credit transaction and throughout the trading relationship; and
- an effective Credit Application and T&Cs.
Coutts has considerable experience in preparing Credit Applications and T&Cs for a range of clients across different industries and in recovering bad debts when they arise.
Please feel free to contact Daniel St George if you would like to discuss or if you require any assistance in relation to reducing your bad debt risks.
This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.