Credit Contracts / Debt Collection
Things to consider before extending credit – Effective debt recovery begins with effective contracts with your clients.
This entails more than merely getting a signature on a piece of paper. Think about the information you will need if you have to sue to recover your debts. Here are some things to consider:
- Are you contracting as a company or in your own name?
- Is the debtor a person, a company or some other type of entity?
- Have you confirmed the identity of the debtor by requesting proof from an individual or have you considered conducting a company or business name search? (we can do these searches for you)
- Have you confirmed the personal and business addresses of each of the debtors?
- Have you recorded all this information accurately in the contract?
- Have you conducted a credit check on the debtor and, if applicable, its directors or proprietors or promoters?
- Have you identified fully and precisely the money, goods or services to be provided by you?
- Have you specified precisely when payment is due?
- Have you specified precisely what will happen if payment is not made by the due date?
- If you want to charge interest, have you specified precisely the rate to be charged, the method of calculation and the date from which interest will run?
- If you are selling goods, have you made clear precisely when title to the goods passes to the purchaser and have you included a Romalpa or retention of title clause? For those not familiar with Romalpa clause, it is a term in a contract that states that the title or ownership to the goods do not pass until payment is received.
- If there is to be a course of trading, have you obtained the debtors agreement and signature to a comprehensive and well–drafted Terms of Trading?
- If the debtor is a company, or if you have some doubts about ability to pay, should you get personal guarantees from third parties?
- Do you have a well drafted form of guarantee?
You should have in your contract a cost recoverable clause that will allow you to claim most of your legal fees and other costs of recovery from the debtor. You should have the debtor's agreement to your terms before you perform your part of the transaction. It may not be enough to rely on your terms of trading on the reverse of your invoice. You must enforce your terms, otherwise you are sending an implicit message to the debtor that you do not care. How you enforce your terms is a matter for your commercial judgement. The best thing to do is immediately after the due date, an account rendered be sent, specifying a new due date. If the debt is still not paid, refer the matter to a lawyer for legal action. The longer a debt is left unpaid, the harder it will be to recover. It must be made clear to the debtor that you will not let up until you have been paid. Remember that, if you have to sue to recover your debt, the court will require you to prove your case. Careful documentation of the transaction, and of your enforcement action, will play a very important part in that proof.