How To Deal With Creditors?
Maintaining a strong working relationship with creditors is pivotal to the success of any business. A failure to do so could lead to insurmountable debt and the unwanted threat of liquidation. Knowing how to deal with creditors is a skill that can be developed very quickly and we will explore numerous reasons why it can be the difference between success and failure. This article provides useful information on how to manage creditors effectively and how to negotiate with creditors for debt settlement when facing financial difficulties.
Why is it important to keep good relationships with creditors?
Keeping a balance between when you need to pay creditors and when you receive payment from debtors such as customers is vital to the cash flow of a business. Having a good relationship with creditors may allow you to extend credit beyond the value of debt which creates the opportunity to reduce the working capital required to run your business. This is particularly useful in periods of growth with additional finances available to capitalise on business opportunities.
The benefits of developing a trustworthy relationship are sometimes most evident in times of financial difficulty. An inability to pay debts on time or consistently paying them late are among the most obvious signs that a business may be trading insolvent. Creditors may fear that your business is in danger of entering into voluntary administration, or even liquidation.
How do you ensure creditors are paid on time?
Sticking to fundamental business principles and implementing some basic procedures can help ensure creditors are paid on time. The following is a good starting point:
Payment Policy: You should set out a payment agreement with each of your suppliers. A generic policy is essential, but you should alter it for specific suppliers. Most policies require payment within 30 days of the invoice, but it may be beneficial to negotiate 60 or 90 days for larger accounts to ensure that you can pay on time. Explore discount options for early payment and review your terms regularly.
Bookkeeping: Having accurate and up-to-date records is vital. This will allow you to easily identify any outstanding debts and when their due date. They also provide the opportunity to prioritise debts and manage cash flow. Utilising specialist software or professional services such as an accountant is strongly recommended.
Good Relationships: Having strong personal relationships with creditors can be very beneficial. This can be useful at times when you may require a rushed delivery, extended credit, or additional time to pay. Having open and clear lines of communication is ideal.
Identify Key Creditors: Some suppliers and creditors will be more crucial to the success of your business than others. This may be due to the importance of the products they provide, or the amount of money spent compared to others. At a minimum, you should identify these creditors and use the above to build strong business relationships with them.
Replicate for accounts receivable: The above should be replicated in all aspects of business, in particular accounts receivable. Receiving payments on time will provide a balanced cash flow and ensure that creditors are paid on time. Invoicing apps are an effective tool for financial essentials including bookkeeping, accounting, cash flow, and taxation.
Learn more about how to stay on top of business finances.
How do you communicate with creditors?
Good communication with creditors is imperative but our focus here will be on how to manage creditors effectively during times of financial difficulty. If you are unable to meet your financial commitments and are in danger of trading insolvent, it is important to initiate contact with creditors rather than wait for them to contact you after things have become an issue. It is best to:
- Explain why you cannot pay on time
- Outline your current financial situation to them
- Detail any other financial obligations you may have
- Discuss your immediate and future income prospects, and
- Explore potential solutions.
Where possible you should visit local creditors in person. Alternatively, a phone discussion is adequate but should be followed up with a letter or email that outlines any new terms that have been agreed upon by the parties involved.
How do you negotiate with creditors?
The foundations for effective negotiation with creditors begin with implementing the communication techniques mentioned above. Prior to contacting a creditor with respect to an outstanding debt, you should first determine the exact amount of the debt and the amount you can afford to pay over a periodic period. When looking at how to negotiate with creditors for debt settlement, consider proposing the following alternatives:
- Request for late fees to be reduced or waived completely
- Propose the return of unused items purchased on credit
- Put forward a payment plan that encompasses a smaller but regular payment
- Ask for a deferred payment period if you are expecting an increase in cash flow at a specific time in the future.
If the creditor in question is a lending institution such as a bank, you may be able to:
- Reduce the minimum monthly payment required
- Change your repayment type to interest only for a nominated period until you can resume normal repayments
- Refinance the loan.
When an outcome is agreed upon, it is important to get it in writing. Take notes during any negotiations and be diligent with any mail that you receive – both via post and electronically. It is always better to deal with creditors rather than debt collectors and this is a mentality that should be maintained throughout negotiations. Those who cannot get a grasp of their financial position, or the negotiation process can obtain expert advice. Australian Debt Solvers provides professional business advisory services covering all matters.
How can a debt collector settle for less?
It is not uncommon for unpaid creditors to hire a debt collector or sell their debt to a collection agency. Knowledge of the process, your rights, and the legal obligations of a debt collector will assist in any negotiations. The Australian Competition & Consumer Commission (ACCC) has specific guidelines that outline what debt collectors can and cannot do.
The primary aim of a debt collector is to recover all the money owed but creditors are often willing to settle on alternate terms. This is particularly the case for unsecured creditors as they are at the bottom of the list when it comes to getting paid when a company goes into liquidation.
What should I offer a debt collector for a settlement?
Any contact from a debt collector should not be ignored and an attempt to find a solution should be made. When negotiating with a debt collector for settlement there is some critical information that you need to try and uncover. This includes:
- The minimum amount they will accept to clear the debt
- The prospects of a potential discount if you can come up with a lump sum
- Payment plan options.
A failure to act could result in subsequent action such as administration or liquidation. Companies that choose voluntary administration often enter a Deed of Company Arrangement (DOCA) which attempts to minimise the impact of insolvency by offering a better return for creditors and helping businesses avoid liquidation. Where creditors are unable to come to any agreement, they may decide to apply to the court to initiate liquidation proceedings. Receiving a wind-up notice is the first sign of this and a failure to act before the specified date may result in your company being liquidated.
The severity of the ramifications highlight the importance of addressing financial difficulties as soon as they come to light. If there are signs that your business is in trouble, taking immediate action will increase the prospects of returning to a position of financial strength.
We care about our customersAt Australian Debt solvers we take feedback seriously and pride ourselves on providing the best customer services possible
Rated 5 out of 5