New Zealand has a large number of self-employed people who have overnight had their income reduced drastically, while their fixed costs of business and life have largely stayed the same.
This has been coupled with a decimated tourism and hospitality industry, which in some towns makes up the bulk of employment and revenue generation.
While the banks and finance companies may be able to offer some relief, the struggle remains real. Credit providers must pivot to face the changes. Carrying on business the same way will create problems where none were before and make existing problems worse.
Some ways that businesses can pivot in these uncertain times are:
Mobile Eftpos or Prepay:
The majority of bad debts in the trades and services industries are for accounts between $100 and $250. These are largely uneconomic to collect through agencies civil recovery methods.
If your service is regular and for a set fee, move to a prepay service. If your service is an emergency call out service, have a mobile accounting system like Xero and a mobile eftpos system. Take an extra five minutes at the end of the job to add up the invoice, email it, then take payment instantly. It will save you hours of mucking around later.
If you are providing services to consumers, there should be no expectation of 20th of the month following, payment terms. Letting the customer know this in advance will ensure that there are no surprises.
Deposits:
The kitchen supply industry has a great payment structure that I feel should be implemented across a wider range of industries. This is made up as follows: 40 percent on commission, 40 percent after manufacture, and 20 percent upon installation. That means if the customer hits the wall financially, the supplier is out 20, not 100 percent.
I have always said that deposits are the best bulldust filter out there. If a customer without an approved credit account won’t pay a 40 percent deposit up front, especially for bespoke goods when the supplier has the most leverage, the expectation they will pay 100 percent when there is reduced leverage may be a tad unrealistic.
Shortened Collection Cycles:
Businesses often refer accounts to collection after 90 days. In these times, this is too long. If a debtor is communicating and two promises to pay have not resulted in payment, or the debtor has told you of financial hardship, you could make an offer of payment over three months by direct debit instalments.
If a debtor is not communicating at all, I advise sending the account for collection no later than 60 days. If costs can be passed on and you have the right to default list the debtor, your chance of recovery at negligible cost is greatly improved.
Unfortunately, there are going to be some businesses that going to find it very hard going to make it through. International tourism-dependent businesses and close personal contact businesses are in the unenviable position of not knowing when their business can continue and therefore will be very protective of what cash reserves they have left.
Having to juggle between legal obligations to staff and to suppliers could make businesses decide payments on the basis of which action has the most severe consequences. Suppliers dealing with these type of industries have to find a balance between being paid on time and not being paid at all.
Having a written acknowledgement of debt, PPSR security and a personal guarantee would all be advisable to give some kind of surety. But this should be countered with negotiating a direct debit payment plan that both parties can live with.
The current economic environment has highlighted the need to have best practice credit management systems in place, proper terms of trade and disclosure methodologies. The ability to be a secured creditor where appropriate, credit-checking facilities and support in place to collect debts if needed, is essential to give you the best chance of weathering the financial storm.
Just a thought.
