Managing Bad Debt an Easier Way
One of the inevitabilities of running a business is that you will encounter bad debt.
As a business that services customers out on the road, you may even find yourself in a situation where you have to face customers who have unpaid bills but who are requesting further service from you. Or, you may just find yourself with a few customers who simply aren’t settling their accounts and the time has come for you to take action. So, what is the best way to go about it?
Well firstly, it helps to be able to put bad debt into perspective. The 2016 Census highlighted some pretty significant debtrelated issues in Australia. For example, approximately three in ten households (29 per cent of all Australians) were classified as ‘over indebted’. Debt growth has outpaced the growth of incomes and assets during the same period, further driving this figure higher. This means that, potentially, a third of your customer base has to regularly make decisions with regards to which bills they pay and which they don’t – a scary prospect!
The reality is that bad debt is just a part of being in business but it’s getting harder to take charge and clear debt. If your bad debt has become overwhelming – to the point that you aren’t making a profit – or you cannot see a long-term future for the business, it may be time to investigate your options.
Taking the legal route i.e. threatening debtors with legal action, usually brings some form of response but it’s not the only option you should consider. The downside is that many customers don’t respond positively to legal action. At least, they may pay their bill, but they might decide never to use your services again.
Whilst you might not care about losing certain debtors as customers, other more honourable customers may just be going through a rough patch and could become great customers again after they have resolved their financial issues. Therefore you should always consider the softer, more collaborative approaches to managing debt first, before you resort to litigation, which can also be very expensive.
What is debt mediation?
Debt mediation is a process in which a mediator brings you and your debtors together to discuss how to deal with outstanding debt and to work through a repayment plan that is satisfactory to all parties. The goal is for all parties to agree on a way forward so that the matter can be resolved amicably, leaving the door open for future trade if circumstances permit. Debt mediation also keeps the lines of communication open.
Debt mediation is particulary used when a debtor has incurred large amounts of business debt, but it has also been used in cases of cnsumer debt as well. There are even cases now of banks engaging in debt mediation, rather than going down the litigation route.
How to get started – get YOUR house in order first…
If bad debt is not crippling your business, you can move straight into debt mediation with your customers. But, if you are in the quick-sand of debt yourself, as a result of bad customer debt, you may first want to seek the advice of a debt-counsellor. More often than not, banks and other financial institutions will provide debt-counselling at no extra cost. Depending on your current financial situation, the debt-counsellor can create a debt managementt plan for you so that you can actively address YOUR debt to banks and other parties that may have been brought on by customer bad debt whilst engaging customers to resolve their bad debts.
Once you have decided to engage a mediator, be sure to contact a mediator accredited under the National Mediation Accreditation System (NMAS). The mediator will provide you with all of the information you require to set up a mediation session with your customer.
There is usually a three-step process for dispute resolution by mediation. The first step will see the mediator meet with all parties separately and privately for a consultation. In these private sessions, the background to the dispute is discussed and all issues laid on the table so that the mediation session takes into account all relevant information.
After the initial meetings, a joint session will be arranged aimed to resolve the dispute and come to an agreed outcome. The mediator will lay out the guidelines of the discussion and the roles of people involved. Concerns raised by both sides will be explained and summarised, and an agenda will be formed for the discussion. The mediator will speak to all the people involved together and also talk to you privately during the course of the mediation to check how you are feeling about the session and to discuss anything that you do not feel comfortable to say to the other person in the joint session. You will then be encouraged to come up with options for resolution and negotiate the outcome with the support and assistance of the mediator. Once agreed, the outcome is written down and signed by all people present, and you may then have it legally formalised with your lawyer, if you wish.
Alison Shaw is a former lawyer and CEO of national mediation firm SHAW Dispute Resolution Australia. SHAW Mediation offers voluntary mediation opportunities to everyone for all types of disputes anywhere, anytime for fixed scaled fees. Alison and her national team of mediators are all nationally accredited and have a legal background.