Collecting debts in hard times
This article first appeared in MG Business in December 2008
There are a number of issues I'd like to cover in this column: first, I spoke to a credit manager the other day who told me she had received a fax from a lawyer acting for one her customers. He said that the customer's business was being sold and that he expected her company's debt to be paid in full in the next few days. He asked her to remove the registration of the security interest her company had taken over stock it had supplied, so that the transfer of the business could proceed. She was owed about $3000.
The next day she got another fax from another lawyer saying that her customer was insolvent and it was expected that there would be insufficient money to pay even secured creditors. The simple moral in this story: if a lawyer asks you to remove a security so that a business can sell, get a written undertaking from that lawyer that you will be paid. Then if the debtor doesn't pay, the lawyer has to. You're best to have your own lawyer draft the undertaking so that there are no weasel words which allow him to slide out of the responsibility.
Second story: Credit insurers are busy at the moment. With the world's economy looking dire, it's a good time to pass on the risk of non-payment by your business to an insurance company. However, those credit insurance companies are not complete idiots. In November, the three big European credit insurers who do 80% of the world's credit insurance removed cover from suppliers to troubled U.S. carmakers General Motors and Ford. Similarly, by October, none of the big credit insurers would cover suppliers to UK high street retailer, Woolworths, which everyone knew was in deep strife.
This is symptomatic of the problems businesses closer to home are finding. Credit insurers are putting certain industries on their watch lists and reducing cover to those industries or to particular players in the industry. For example, it's not a good time to be selling into the US construction industry.
Someone told me the other day about a New Zealand manufacturer that had coverage of 10 major overseas customers removed in one hit. If it wanted to continue to supply to those customers, it would do so without credit insurance. However, it needed credit insurance, not just so that it could be confident of getting paid, but so that it could get funding from its bank. The bank was lending on the security of the manufacturer's debtors' ledger. If there was no credit insurance covering major debtors on that ledger, the bank wouldn't provide funds.
Three weeks later, the manufacturer announced a restructure and laid off staff.
Third story: the Sydney Morning Herald reported on December 10, 2008, that Australian credit card holders "are racking up more than $1 billion in cash advances on their credit cards in a single month, marking a 14 per cent increase on the same time last year." (Buy now, suffer later: how banks cash in on credit-card battlers.) The Herald got this information from the Reserve Bank of Australia. I've looked for similar data from our Reserve Bank but it doesn't appear to be available. However, you can see from the chart below that credit card use by New Zealanders has risen dramatically since the major recession in the early 1990s.
Back in 1991, many struggling consumers didn't have (or at least didn't have to the extent they do now) the option of using their credit cards to pay bills, or even using them to withdraw cash to meet expenses. In fact, if they have more than one card, they can make a cash withdrawal on one to make payments on the other, at least for a while. Few finance companies are now offering debt consolidation loans (which have always looked to me to be very high risk lending), so the credit card is the only way to use debt to pay off debt and stave off the evil day when you have to face bankruptcy. We live in interesting times.
And lastly, I recently asked credit reporter, Veda Advantage, for its view on the ability of New Zealand creditors to use the Australian Veda database to track down New Zealand debtors fleeing to Australia to avoid their creditors. It's all bad news. Veda believes New Zealand companies can't use Veda in Australia unless their customer has signed an Australian privacy clause on Australian territory. Nor can an Australian debt collector use the database. If neighbours and relatives of the debtor won't say where they have gone, your best bet is to find them via Bebo or Facebook.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.