By Chris Parke
Solicitor
Kensington Swan
The cost and availability of funds for business have tightened considerably in the last six months, primarily as a result of the recent finance company collapses, and the increase in wholesale funding costs being passed on to business and home-owners.
Of concern to the New Zealand economy, heavily dominated by small to medium sized businesses, is the potential reduction in the availability of funding. Many smaller businesses and property developers rely heavily on alternative funding streams to those of the traditional first-tier lenders. Anecdotal evidence indicates those in the development area particularly are struggling to find sources of new funds at reasonable prices.
For the finance companies that have survived, the cost of funds has increased as retail investors avoid bond issues, and other wholesale sources of funding have dried up.
A direct consequence of this tightening for New Zealand contractors is the increasing use by debtors of their creditors as a cheap and available source of funding. Our experience, and recent media comment, indicates a noticeable increase in payment terms, and defaults from debtors. Recent research highlights businesses in the one-to-five employee category as the “slowest payers”. With this situation unlikely to improve soon, contractors must look at protecting themselves against the risk of late, or even non-payment by debtors.
Recommendations
There are some obvious ways to combat this creep in payment terms to give you the best possible chance of recovering from debtors should they default. The following are some practical steps that can be taken to give your business the best chance of recovering its debtors:
- Ensure you have a fully completed and signed account application form for each customer, and a system allowing ready access to those details.
- Make sure your terms of trade are in place and up-to-date.
- If your standard contract/subcontract terms are more favourable than the default provisions of the Construction Contracts Act 2002 (“CCA”), ensure your contracts are completed and signed.
- Confirm you have registered financing statements on the Personal Property Securities Register (PPSR) to protect your interest in inventory supplied under a retention of title clause, or in respect of plant leased for a period in excess of 12 months.
- Make sure your description of goods in any financing statement is wide enough to cover ‘proceeds’ of inventory.
- Ask directors of smaller companies to provide a personal guarantee. These are much quicker and cost effective to enforce than an application to wind up a company.
- Make sure your terms of trade/contracts include the ability to seek default interest, together with recovery on a solicitor client basis of costs, in the case of enforcement.
- Ensure you have up-to-date contact details for your customers, including names, addresses and phone numbers of shareholders and directors.
- Discuss with your customers any particular invoicing requirements which will assist with speeding up payment.
- Make sure your invoices contain the right information, such as the correct order number, and importantly, that they comply with the CCA. Failure to comply with these requirements may slow payment, and provide customers with the perfect reason to delay or even avoid payment.
- Ensure the invoice is for the correct amount. This seems obvious, but errors in invoicing requiring the re-issue of an invoice simply delay payment from one month to the next.
- Ensure payment claims are ‘served’ correctly under your contract and the CCA.
- Resist the temptation to continue to supply when the client is well past normal payment terms. Utilise the right to suspend work under and in strict compliance with the CCA.
- Take action quickly when a debt goes ‘bad’. Talk with the client and ascertain whether they ‘won’t’ or ‘can’t’ pay. Try to formulate strategies for receiving payment, even if this is over time, or seek security for the debt. If the client ‘won’t’ pay, and there are no issues with the invoice, consider enforcement and take steps early.
- Implement a range of internal credit controls and processes to ensure that the first priority is that debtors are paid on time, and doubtful or suspect debts are identified early and managed.
Many of the suggestions above seem obvious. However, it is surprising how often businesses fail to take the most simple of steps to protect their position, especially when business has been good for a long time.
Given the current state of the market, and the likelihood that such conditions will continue for some time to come, it is imperative that a more pro-active and systematic approach is taken to debtor management.
- This article is not a substitute for legal advice.
Contractor Vol.32 No.5 June 2008
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