DebtCallEvery hour spent chasing an unpaid invoice is an hour you didn't want to spend. The good news is that a large share of bad debts are avoidable – not by chasing harder, but by being more careful about who you extend credit to in the first place. A little due diligence before you agree to invoice-and-wait terms can spare you months of follow-up later. Here's how to size up a new customer before you take the risk.
Know exactly who you're dealing with
The first job is to identify the real legal entity behind the customer – not just the name on their email signature. A business name is only a trading label; behind it sits a sole trader, a partnership, a company or a trust, and it's that entity you'll be contracting with and, if it comes to it, pursuing. Getting this wrong – signing up the wrong entity, or one that turns out to be an assetless shell – is one of the most common and avoidable reasons recovery later fails, so it's worth a few minutes up front.
Two free checks do most of the work, and you can do both yourself in minutes. ABN Lookup (abr.business.gov.au) confirms the ABN is active, along with the entity's legal name and type and its GST registration. A company ASIC search confirms the ACN, the company's status (registered, deregistered or under external administration), its registered office and its directors. Watch for one classic trap: a corporate trustee – a shell company acting as trustee for a trust, holding no assets in its own right – where a judgment against it may recover nothing. If a trust is involved, make sure you're contracting with the right party (the trustee in its capacity as trustee) and consider a guarantee.
Check their credit history
For anything beyond a small first order, pull a business credit report. Australia's main commercial credit bureaus – CreditorWatch, Equifax and Experian (which has absorbed illion) – compile reports that reveal a great deal: a credit score or risk rating, payment defaults, court judgments and writs, ATO tax-debt defaults, insolvency events, and the customer's directorships and structure. A history of defaults is the single clearest warning sign you'll get – a business already carrying a payment default has a materially higher chance of failing within the year.
You can also add important customers to a monitoring or watchlist so you're alerted when their risk profile worsens. A new default or court action against a customer who owes you money is something you want to hear about early, not discover when your own invoice goes unpaid.
Look at the people behind the business
A company is only as sound as the people running it. A paid ASIC extract lists the directors, and ASIC's free banned and disqualified persons register lets you check whether someone has been disqualified from managing companies. Commercial credit reports and ASIC records also reveal a director's history of failed companies – a trail of deregistered or externally-administered businesses can be a red flag for "phoenixing", where the same people repeatedly wind up one company and start another to shed its debts. (Every company director is now required to hold a verified Director Identification Number, introduced to curb exactly this behaviour, though the register itself isn't publicly searchable.)
See what's already claimed over their assets
A quick PPSR search (ppsr.gov.au, for a couple of dollars) shows whether the customer's assets are already secured by other creditors – banks, financiers or other suppliers. If everything they own is already pledged as security to someone ranking ahead of you, your practical chance of recovering from those assets shrinks accordingly. The same register is where you'd register your own retention-of-title interest over the goods you supply – so searching it first also tells you where you'd stand.
Take the industry into account
Some sectors simply carry more risk than others, and it's worth knowing where your customer sits. Recent CreditorWatch data has consistently shown hospitality – cafes, restaurants and takeaway food – with the highest business closure rate, well above the national average, with construction, retail and transport also under strain. Industry isn't destiny, and a strong operator in a shaky sector can be a perfectly good customer, but it should calibrate how much credit you extend and how closely you watch the account.
Ask for references – and actually call them
Old-fashioned, and still effective. Ask a new credit customer for a few trade references – other suppliers they deal with – and phone them. A two-minute call about whether the customer pays on time, and whether there's ever been a dispute, tells you things no database will. A bank reference can add to the picture, though banks tend to be guarded. The point is to make the checks real rather than a box-ticking exercise on the application form.
Put it all in a credit application
The tidy way to gather all of this is a proper credit application form, completed and signed before you extend any credit. A good one collects the full legal entity name and ABN/ACN, the business structure, the directors' details, several trade references, and the credit limit sought – and it's where the customer accepts your terms of trade and, for a company, signs a director's personal guarantee. Use what you learn to set a sensible credit limit and payment terms, put them in writing, and re-check your bigger customers periodically, because a customer who was solid a year ago may not be today.
When prevention isn't enough
Even the best vetting won't make you immune – good customers hit hard times, and some risks only surface after you've extended credit. When a debt does slip through despite your best efforts, the goal is to deal with it quickly and cheaply. DebtCall, as a law firm, issues a formal letter of demand for the Pre-Court Fee, delivered by email and SMS, with payment going straight to your own account and a clear path to court if you need it. Good vetting keeps the number of debts you have to chase small; a fast, affordable demand handles the ones that get through.
This article is general information only and is not legal advice.
Owed money? Start a case with DebtCall for the Pre-Court Fee – a law-firm letter of demand by email and SMS. For advice about your own situation, contact us, or learn more about DebtCall.