The following case studies show how a little bit of research about a customer before you offer credit can save a lot of problems later on. Unlike many other debt collection firms Brodie Collection Services assist in helping clients avoid bad debts in the first place.
LIES & MORE LIES
A client, who has lost money in the past from customers who have been extended credit but have subsequently failed to pay outstanding amounts owing, now regularly engages us to verify the information supplied by customers in their credit application forms. This helps them to make an informed decision about the risks in supplying credit to new customers. The client is quite often amazed at how often people blatantly lie on their credit application forms – probably presuming that no one will bother to check the details.
Some customers, on completion of their credit application forms, seem to be suitable to extend credit to. However, once verification of the credit application form has been completed it is quickly determined that extending credit is not a very good idea. The following are some of the issues we regularly come across when we check credit application forms for clients.
By far, one of the most common issues uncovered, when a check of a credit application form is undertaken, is that the home is not owned by the person claiming to own it. It is important to know if a director of the company, who has applied to be extended credit by your business, owns his own home. This is because, for most people, the family home is their main asset and if they have signed a Guarantee then it will most likely be worthless if they do not own their own home. This is because there is unlikely to any other significant assets you can pursue to seek redress for the amount owed to you.
Quite often a director will sign a credit application form stating that he owns his own home. However when a Land Titles Search is undertaken this is found not to be correct. In fact, it is estimated that at least 25% of people claim to own a home on a credit application form but do not. Sometimes the home is owned by a spouse, partner or even parent. Other times, the home is owned by someone completely different and the director is merely renting.
It is also important to find out if the company that is seeking credit from you has any charges over its assets. This is important for several reasons – the main one being that if there is a charge over the assets of the company, the Chargee ranks ahead of you in claiming the assets of the company. This may mean there are no assets left over to pay the amount owing to you.
Another reason to check if there is a charge over assets is that the company may be under financial stress. An ASIC check will be able to verify the number, and the dates entered of any charges against the assets of the company. Again, if a customer has stated that there is no charge over the assets of the company, but in fact there are, then more lies are being made.
One fact that is often not looked into is the ownership of the company. Often the company seeking credit is owned by individuals. However, at other times it is owned by another company. This may not initially seem significant but in fact it can be. Although there is nothing illegal about a company being owned by another company it should still be investigated further as it may undercover deceptive behaviour. A parent company could be used to own the assets of the company that you are doing business with. This means if the business you are dealing with does not pay what it owes you, then you may have little hope of ever getting paid. This is because you are not doing business with the parent company – which means you cannot seek payment from them unless you have been able to get a signed guarantee from them.
There is a lot written about ‘Phoenix Companies’ and it is another thing you need to be on the lookout for. In simple terms it is someone who sets up and then winds up a company – without paying the debts owed. It can not only leave you without payment but also the employees of the company in question. Again, an ASIC check can try to undercover this very deceptive behaviour – by finding out if the directors have been directors of other companies (especially in a similar industry).
The above are all situations we have uncovered in the course of checking credit application forms and guarantee statements. All too often it is thought that simply getting these forms signed is enough. Unfortunately, it is far from enough and additional work should be undertaken to verify the information contained in them. Only then can you make an informed decision about whether to extend credit to a customer.
DEBT COLLECTION ON AN INTERNATIONAL SCALE
One of our international clients, based in South Africa, recently sought our debt collection services in recovering a debt outstanding by an Australian customer. Our client operates as a merchant and acts for many local villages in the sale of locally made products. The money generated from the sale of the products is used to pay individual persons from rural community and projects that have a beneficial impact on the entire village. The amount owing was Aus $3,033 or ZAR 35,171 (South Africian Rand), an amount small on Australian standards, when not paid. The loss of ZAR 35,171 would have a severe impact on the local villages involved.
The only information we had to try and track the debtor was the persons name and P O Box in Melbourne. With this information we did a business name search which confirmed the persons name and ownership of the business name, using the persons name a land title search was done to confirm ownership and the residential address of the sole proprietor of the Melbourne business owing the debt.
With this information, we were able to contact the debtor, and formally demand payment. As expected, the debtor came up with varying excuses for not paying. One excuse was that it was the fault of the bank in South Africa, who it was claimed had received the funds but somehow had lost it. This was extremely unlikely as our client did not have similar issues with their other Australian customers. In addition, despite numerous requests to the debtor, no confirmation of the bank transaction was ever provided.
To seek a final resolution to this matter, we demanded that payment be made by a certain date or we would contact various international charitable organisations that this person was claiming on the business website that they help create employment in disadvantaged communities of South Africa, paying them a fair rate, even though they had not made payment for goods received. As predicted, no confirmation was received, and the money was finally transferred to our very relieved client in South Africa.
BE AWARE OF PARENT COMPANIES
A small business (XYZ Pty Ltd) had a new customer (ABC Pty Ltd). A credit application form was completed so XYZ Pty Ltd felt quite comfortable in offering credit to their new customer, even though a personal guarantee was not completed. However, no ASIC check was performed to verify the information completed by the customer.
To find out what went wrong, XYZ Pty Ltd decided to do an ASIC check. The first thing they discovered is that the company they have been dealing with was owned by a parent company. The ASIC search also revealed that the parent company had the same directors as ABC Pty Ltd (the company that XYZ Pty Ltd had been dealing with). In turn, these directors were also the shareholders of the parent company.
If an ASIC check had been performed at the start, it is very unlikely that XYZ Pty Ltd would have considered doing business with them. Now XYZ Pty Ltd has a credit application and personal guarantee provided with each new client and engages Brodie Collection Services to perform an ASIC company search and property title search of the guarantor before they offer credit terms to any new customers. Both searches plus a analysis costs only $110.00 (plus GST) and it is well worth the cost when you consider the alternative of losing thousand of dollars of bad debt. As you are aware bad debt comes off the bottom line of your P & L, that simply means less profit to the company.
PERSONAL GUARANTEES – MAKE SURE THEY ARE VERIFIED
We were recently approached by a client to assist with the recovery of an outstanding debt of approximately $20,000 that the debtor was unable or unwilling to work towards resolving. A detailed credit application form and personal guarantee was signed by the sole director a few years earlier.
On review of the forms completed by the directors it was noted that he stated that he owned his own home. This initially led us to think that we would be able to recover the amount owing. However, when we did an ASIC Property Title Search to confirm ownership after proceeding through to the Magistrates’ Court, it was discovered that the house was not owned by the director but his wife solely.
Luckily, in this case we managed to uncover other assets owned by the sole director. We had information about the sole director’s middle name and this helped in our ASIC Property Title name search – which led us to finding out about a property owned by the director. If we had not had his middle name we would have found it much more difficult and costly in identifying his ownership. Armed with this information, we were able to recover the full amount, plus interest and legal costs.
At $66.00 an ASIC Property Title search is money well spent to confirm whether a director owns the title to their own home. We find a large number of directors simply tick the ‘ownership’ square, either not thinking about the title being in someone else’s name (eg their spouse’s name) or deliberately being deceptive.
The client now performs ASIC checks on every new credit application. Each application has both a Company search and Land Title search done to confirm that the guarantor has the legal title to the residential property listed.
For further information on how Brodie Collection Services can assist in helping you avoid bad debts in the first place, please phone us on (03) 9889 9977.