Converting your Investment in your Buyer’s Dream into Cash for your Business

May 2010 By Michael Royal

How to Collect cash on a Sale – and keep your professionalism, respect and integrity intact

BIR Solutions note: I wrote this in response to a client’s request for some help in collecting on an overdue account – and it just grew and grew to a full scale article! And, I was influenced by a presentation from Donna Smith at a St George Bank Western Region networking group. Donna runs and operates her own debt collection company, Reliance Recoveries www.relrec.com.au. She is a great success story of someone who has followed her passion – to build a better debt collection business – her elevator pitch is ‘more money collected more often’ – not bad!

Remember as you read this: A Sale is only a Sale when you collect the cash. Before you have collected the cash, you have an investment in someone else’s dreams – with no upside to your investment other than a dream that some day you will get paid….

For starters, who said running a business was easy? For many businesses, offering credit to its customers is part and parcel of doing business. If you don’t offer credit, you may not be considered a viable alternative to your competitors. And when your customers are other businesses – particularly large ones, many expect to be able to get credit terms – often 30 days.

To get your sale and keep the process simple, it is important to get a few things done up front so you keep your investment in dreams to a minimum and your sales to a maximum – and you don’t spend too much time converting your investments into sales.

Please note: this article is not intended to be a legal summary but rather, a practical, hands-on summary of the key issues you need to address. A lawyer should be used to make sure you have covered all the bases you need to address. There are many good ones around who are not super expensive and who do this sort of thing for a living – so they are not re-inventing the wheel but they are ensuring that your unique selling proposition can be converted from an investment into a sale. We can help you choose a good solicitor fit for your business – just give us a call on 1300 783 3091300 783 309

Two Parts

 PART I: BEFORE THE SALE

  1. Have a written agreement in place between the two parties (the buyer and the seller).

    Let’s be clear. If you don’t have a written agreement setting out the terms of the sale and purchase, then don’t expect to have much joy collecting on a debt if you need to ‘go legal’.

    And, don’t be someone’s ‘wood duck’ or ‘bunny: If you think a purchaser is ‘shopping around’ and they choose you (without you having a written agreement in place) then you have just dramatically increased your chances of not getting paid. Make no mistake – you are their wood duck, their bunny.

    Your agreement should cover a number of things, the most important of which are:

    a. Legal entities to the transaction: Who is the seller and who is the buyer?

    A legal entity can be sued and can sue for a debt incurred. A legal entity is a person (eg a sole trader), a company, a partnership or a trustee of a trust (NOT the trust itself – this distinction between a trustee and a trust is relevant if you want to go legal to get paid – more on this later).

    b. If the legal entity is a company it must have an ACN (Australian Company Number) which is registered with ASIC (Australian Securities and Investment Commission www.asic.gov.au). This number should be quoted in the document. A Company name ends with either Limited (Ltd) for a public company (most but not are listed companies on the ASX (Australian Securities Exchange) or Proprietary Limited (Pty Ltd).

    An important aside: an ABN or Australian Business Number, is issued by the ATO (Australian Taxation Office) and it does not necessarily relate to the legal entity you would sue. Confused? You should be! However, there is a simple explanation for this apparent anomaly. An ABN is often issued to a trust (which is the taxable entity for the ATO’s purposes) whereas the party you are contracting with for collection purposes is the trustee. Often, the trustee is a company or an individual. Where it is a company, it will have an ACN. Get this ACN on your documentation.

    Back to ACNs. You can do a free search for an ACN and the legal entity to which it relates. It takes 5 minutes and this is a very worthwhile investment of your time. Go to the right hand side of the ASIC home page (www.asic.gov.au) and find the heading ‘Search ASIC Registers’. In the boxes available, enter either the ACN or the company name. If the entity you think you are trading with is not registered here (the search will show “REGD”) then it is either not a company or, it is not who you think it is.

    One last thing on ASIC registered names: if you are dealing with a foreign company or an incorporated association it will have an ARBN (Australian Registered Business Number) – not to be confused with the ABN issued by the ATO mentioned above. This is fairly rare but it can occur so it is good to be aware that it exists.

    If your buyer is trading under a business name (BN) and not a company then you will need to do a further search – at a cost – to find out who owns and who is trading under the business name. This is a bit more difficult but for a fee of around $25, well worth it. (We can assist you with this if you need this done).

    If a legal entity is not a company and is not trading under a business name, then its name will be that which appears on its documentation.

    c. What you are selling and what the person is buying?

    Is it just ‘the goods’? Does it include any pre, during or post sale services? Be clear what it is you expect to get paid for (i.e. what you are selling) and what you are offering for free (i.e. what you are not selling and expect to get paid for).

    d. When is the sale completed – and when does the buyer takes ownership of the items being sold?

    Is the sale completed upon delivery or some other point in time? Be clear when this is as it can get tricky, particularly with service providers, multi-stage sales, long term contracts etc. Also, be clear about the associated documents required – particularly the need for purchase orders from the buyer (from someone authorised to buy) and signed and dated proofs of delivery that they have received what you have sent them.

    e. What rights does the buyer have to return the items sold?

    This may be limited to certain conditions (damaged, faulty or not working items) and it may be limited by a period of time, subject of course to the various legislative requirements (the Commonwealth’s Trade Practices Act and the States Consumer Protection Acts).

    f. What rights does the buyer have if the product is faulty?

    Many suppliers will have warranty periods if their product needs fixing for a recognised fault. It is important to be clear what is covered and what is not covered under warranty.

    g. What document(s) specify payment: how much and when?

    It is important that your payment terms and any discount terms are clearly set out.

    “Payment terms: the gross invoice value to be received within 30 days of invoice date”;

    “Discount terms: 2.5% discount on invoice gross value if the total gross invoice value net of discount is paid and received into our bank within 7 days of the invoice date” are both pretty clear.

    Many major retailers will try and claim a discount even though they have not paid the amount within the agreed terms for the discount on the basis that ‘this is what they do’. If your terms are less than crystal clear, expect to get rolled by them. They do this for a living and make good money out of suppliers who don’t pay the same attention to this that they do.

    Another good idea (if you can do it) is to get either a direct debit set up so you automatically get paid what is owing each month. A bit like a phone company with a payment plan.

    Or, give them the option of paying by credit card if they pay up front. Sure, it costs you the commission for the card but you get the cash and they get terms from their credit card supplier (30 to 60 days) as well as the reward points – and their credit card supplier wears the credit risk.

    h. What if they don’t pay on time?

    You need to set out your legal rights and when you can enforce them. In many cases these days, suppliers will have Retention of Title or Romalpa Clauses drafted into their agreement. They allow the supplier to retain ownership in the goods until they are paid for – which can be more than handy if the customer goes into liquidation as you can either take back the goods or have the insolvency administrator account to you for the sale proceeds of the goods – provided you go and identify on day one (or as close to day one as you can get) what goods of yours are still on hand.

    Also, it is good to agree that you have the right to charge them for any costs you incur if they have not paid the amount overdue by say, more than 30 days.

    i. If it is a company as the buyer, can you get a guarantee from the directors?

    If you are dealing with a private company (either in its own right or as trustee of a trust) then a guarantee from the directors of the company is an excellent idea. Most large suppliers insist upon it. Why don’t you?

    And remember the lesson on being someone’s wood duck above – if they won’t give you a guarantee, the chances of their company not being able to pay has probably increased many times.

  2. Ensure customers understand that the agreement is to protect them – as well as you. It is an agreement – not a one sided baseball bat. It gives them rights as well as you.

    Show them what you are giving them. A good way to structure an agreement is under headings such as:

    “To make this sale work, what we both agree you require of us”

    “To make this sale work, what we both agree we require of you”

  3. Only deal with buyers who meet your standards of doing business.

    This might sound a bit of a dud recommendation as you might miss out on some obvious sales but perhaps they will be the investees who want you to invest in their dreams.

    Do reference checks, understand their history in their current business and legal entity. Find out as much about them as you can. After all, if you want to be in bed with them for the long haul, you need to make sure they are someone you can support in the good times and possibly the bad.

    If they don’t meet your standards but you must do business with them, start slowly and build up and keep a watchful eye on the way through and ensure you keep up your market intelligence from other players in your industry (its amazing how information leaks if you know who to talk to).

    A rule of thumb: if them not paying will hurt you more than the sales you are making to them will benefit you (if they pay), then you are in too deep.

  4. Look at credit insurance.

    This is not the cheapest of options but it can minimise your risks in some high risk industries or, where the amount invested is a large slice of your business and future cashflow.

  5. Make sure your sales team understands and ensures the written agreement is in place for credit customers.

    a. Train your staff and go over the written agreement. At their pace.

    Explain how it works and what it is designed to achieve.

    Explain to them the difference between investments in dreams and sales.

    Show them some of the written agreements you have had to sign with your suppliers so ‘they can see they are not alone’.

    b. Use as case studies any investments in dreams which have not been converted into a sale. Let them work out what could have been done differently to get a different result.

  6. Make sure your sales team has some skin in the game in converting investment in dreams into sales.

    Give your sales team incentives based upon collected cash – not credit sales.

    And better yet, to make sure they understand where you make your money, reward them on the gross margin they achieve after discounts and terms – not the gross sales price.

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PART II: AFTER YOUR INVESTMENT IN SOMEONE ELSE’S DREAM (OOPS, I MEAN, AFTER YOUR SALE)

You have done what you are supposed to do and have invoiced the customer.

You are patiently waiting for the money to complete the sale. And, it doesn’t come.

When do you follow up and how?

Do you get all cranky or do you plead with them to pay? What else can you do?

  1. First, remind them ahead of time that payment is due to complete the sale – and use it as part of your sales pitch for the next sale. Perhaps just use it for recalcitrant payers – or all your credit account customers f it works for you.

    a. On your statement state (something like)

    As you know, we have an agreement that you will pay the amount on our [invoice/statement] [x] days after the date. I am sure you have the payment scheduled to be made on the due date and we appreciate your promptness in payment.

    Personalise it if you know the person it is going to and keep it open, honest and cheerful. People like dealing with friendly people. The only people who don’t are those who don’t want to pay – that is, those that want you to remain as an investor in their dreams.

    b. A letter/email/fax – cc the purchasing officer if you are sending it to your buyer’s Accounts Payable Administrator or the other way around, again whatever works for you:

    Thank you for the opportunity you have given us to supply you with [x]. We appreciate and value our relationship together.

    We thought we would take this opportunity to let you know of some great new deals / special promotions / new products / extra available stock / a new staff member joining us / new distributorship / [you get the picture – something positive about your business which also benefits them]

    Please give us a call / visit us to discuss this with [John Doe], your Account Manager. Or if you prefer, John can give you a call at a convenient time.

    PS As you know, we have an agreement that you will pay the amount on our [invoice/statement] [x] days after the date. I am sure you have the payment scheduled to be made on the due date and we appreciate your promptness in payment. Our bank account details for payment are as follows:

  2. If they haven’t paid on time, then promptly get onto it. Show you care about your agreement and about your business – and theirs.

    Here are 3 scripts with a difference to try and get your investee (I mean customer) to pay and complete the sale ‘as agreed’. You can either put these in writing or you can use them as spiels over the phone – or both.

    a. As you know, we have an agreement. I am to provide you with [x] and you are to pay me within [y] days of my [invoice/statement].

    I have provided you with [x] but you have not paid me within [y] days. Further, as you know, I have not agreed to a change in our agreement.

    I would like you to keep your part of our agreement and make payment for all the amounts which are now over [y] days.

    Whilst I don’t want to impact your business and the service you provide to your customers, I cannot agree to continue to provide you with [x] unless you have brought the amounts in arrears up to date by [date]. Please make payment into our bank account as set out below:

    b. We are both attempting to run a profitable and solvent business. For me to run my business profitably and within my cashflow constraints I need you to make payment on time in accordance with our agreement.

    Whilst I don’t want to impact your business and the service you provide to your customers, I cannot agree to continue to provide you with [x] unless you have brought the amounts in arrears up to date by [date]. Please make payment into our bank account as set out below:

    c. As we both know, you have not paid within the terms of our agreement.

    I am not your banker and I am not in a financial position to be your banker.

    Further, I am not getting any financial benefit from being treated as your banker.

    As I cannot be your banker, I need you to pay me as we have agreed.

    Whilst I don’t want to impact your business and the service you provide to your customers, I cannot agree to continue to provide you with [x] unless you have brought the amounts in arrears up to date by [date]. Please make payment into our bank account as set out below:

  3. The next step – letters of demand. Never a nice part but let’s be honest, when it gets this far there is generally little or no communication from your investee and you are entitled to feel let down by them breaking your agreement (or a subsequent agreement) and, not communicating with you an agreement you can both abide by.

    a. As you know, the amount you owe us is now well over due and you have therefore not completed the sale we commenced when I supplied you [x]. This has caused us considerable financial discomfort and we have also invested significant time in having to chase up this amount owing.

    This is frustrating for us and it detracts from the good efficient business we are trying to run and makes it more difficult for us to service our customers who pay on time with good prices.

    It is disappointing you have also not come back to us with an alternative payment plan which we could agree to / you have broken the alternative agreement we arrived at and which was sent to you on [date].

    We regret this has occurred as we have enjoyed doing business with you.

    However, as it is no longer cost effective for us to deal with this matter, we are passing it to our debt collectors to finalise. This matter will be passed to them within 7 days of the date of this letter.

    They will incur costs in collecting the debt from you and pursuant to our agreement, we have a right to charge these costs on to you. This will increase the amount you owe.

    So, to try and resolve this matter before these costs are incurred, please pay the amount due in the next 3 days. Our bank account details are set out below:

    b. At this stage, if you have not had a good agreement in place, now is the time to get your agreement updated and signed – particularly if they want to alter the agreement and pay off the debt over time. Get all the things in the written agreement that you need – including guarantees. Even try to get 3rd party or real property security (eg over a residential property) if the amount owing is large and important to you. This may be your saving grace.

  4. The next step – go legal (and please, I assume you stopped supplying some time ago!!!)

    a. In my view and from speaking to debt collectors, the longer you leave this step the harder it is to collect the full amount owing. A debt collector I know well told me that debts over 12 months old may as well be written off, so hard and difficult are they to collect.

    I will leave it for you to be the judge as to when you go legal but I would recommend no later than 120 days from the due date for payment – unless they have a payment plan which they are managing to stick to.

    b. Choose a debt collection agent or solicitor which operates in a fair and reasonable manner. Ultimately, they are seen as an extension of you and your business practices so how they behave will reflect indirectly on you and your business.

    I am a firm believer in what goes around comes around. Even under what appear to be the most obvious circumstances of deception, there can be truths behind the facts which might make you wish you were a little kinder on the way through in life.

    Whilst we all want to get paid for what we do, in my view there is no merit in getting nasty or vindictive just because you have not been paid. And, to be honest, you probably need to take a look in the mirror and ask yourself “How did I get my business into this position?”

    c. Having given my spiel on karma and life, keep the collection process open, honest and professional. Always bear in mind the costs versus the returns you are going to get. Let’s face it, by the time it gets to collection, there must be some doubt as to payment.

    d. Remember that any payment you get once you have issued demands may be clawed back by a liquidator if one is subsequently appointed over your customer. A liquidator has a 6 month window prior to the date of their appointment to look at what are called preferential payments made to people like you and they can make a demand upon you for payment to them of what you were paid during those 6 months.

    Yuk! Talk about a bad return on your investment in your buyer’s dreams!!!

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