Bad Debts: Recognising and Resolving
Bad debts are a reality of business. Fortunately, we have only had one negative experience in our eight years of operation... so far.
However, this one experience has been enough to make us realise how much we operate on trust and the risks we are exposed to if that trust breaks down.
Any new project has an element of risk that needs to be considered before taking on the work. This is especially the case when working with clients and suppliers for the first time:
Have we worked with this client before?
How are they to work with?
Are they a payment risk?
Have we done this kind of work before?
Can the work be completed with confidence?
What is the cost if any corrective action is needed?
Can we do the work safely?
Do we need to use suppliers?
Have we worked with them before?
Are they reliable ?
What are their payment terms?
What alternatives do we have if they do not deliver 100%
What is the cost if any corrective action is needed?
Any country / industry specific considerations/risks?
However, in the majority of cases, the evaluation is focused on our ability to meet the project requirements, not on evaluating if the client a payment risk.
With project work, staged payments are often used (e.g. 50% on commissioning and 50% on completion) to help balance the risk for both clients and suppliers:
Clients need to know they will receive what they asked for
Suppliers need to be paid for the work completed
Reaching agreement on payment stages and payment terms is not always easy. It can be compounded with international research as terms and average payment days do differ by country. In the UK for example, 30 days is quite common, but in Latin America, most fieldwork providers are paid in advance at least until a relationship is established.
Once agreement has been reached, both parties are happy to proceed.
Opportunity to Eat and Run!
However, the reality is that staged payments and 30 day payment terms can be open to abuse. There is a point where the work has been done, the client receives the results and the supplier trusts the payment will be received. That is when the project income is most at risk.
Recognising the Warning Signs
As a service company, maintaining and building client relationships are extremely important. It can therefore be hard to recognise and accept that client who received the results and was happy with them, actually has no intention of paying the second invoice. It requires a mental adjustment and acceptance.
In our case, we had some reservations and required 50% payment on commissioning, which was promptly paid. The project was delivered and we received positive feedback. The problem only started when the second 50% invoice was due for payment. After a month of receiving promises of payment, the excuse changed from 'being out of the country' to 'the Chairman didn't like the findings, the story wasn't positive enough'. If this was a genuine reason we would have had different feedback when delivering the interim and final results. Fortunately for us, it was a very small project and the amount owed was small.
Some of the learning from our experience and the 'warning signs' we look out for may help others.
Haggling over the proposal cost
Never a great start to a project and immediately raised some concerns over willingness to pay, but not that unusual.
In hindsight, this is the point we should have walked away.
Use of a Gmail account
This made us more cautious, but with Covid and many other small companies in Latin America using Gmail we proceeded.
We had also reviewed the client on LinkedIn.
Independents consultants and SMEs are a higher risk than large companies and options for credit checking are more limited.
Length of delay
Small payment delays are normal and we like to work with people. However, there comes a point when you realise it is just stalling and the client has no intention of paying.
After a month of chasing, the excuses changed from 'being out of the country', 'payment has been sent', 'part payment has been sent' to 'the Chairman didn't like the findings'.
There are many companies that specialise in bad debt recovery in any country and they can be easily found online. They fall into two broad types:
Debt purchasers: companies that give an immediate payment to take the debt from you. The payment will be less than the full value of the debt, but the main advantage is it is immediate. Essentially the debt is 'sold on'.
The second type offer a 'no win, no fee' arrangement. The fees are typically lower, but the process can take longer.
It is important to note that the amount is not limited to the invoice value. The recovered value can include back interest, compensation and reasonable costs. This needs to be clearly agreed with the debt recovery company as there can be a sizeable difference between the amount you receive and what the debt recovery company recovers.
Details of late / non payers should also be shared, especially with relevant industry professional bodies. Depending on the organisation, a database of late payers may be kept which is a great reference tool and helps protect other members.
Overall, we have been lucky. Ours has been a valuable learning experience that did not cost us much. It has, however, given us a much greater appreciation and focus on risk assessment when working with new clients and suppliers. Our main takeaway is a more cautious approach, like the old saying 'if in doubt, there is no doubt'.
With special thanks to Mohammad Irshaid, Foodservice Consultant based in Dubai for his contribution that made this blog possible.