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Use these two tips to manage your debtors so you can avoid falling into the same trap as African Bank

by , 11 August 2014
African Bank Investments Limited is in turmoil. Last week, the bank's share price tumbled to a near-20 year low as the lender was unable to plug a R8.5 billion hole in its finances from a tide of unsecured loans that have gone bad.

According to Reuters, the bank, widely known as Abil, shocked the market on Wednesday when it said it needed to raise R8.5 billion in new capital after warning of a massive annual loss, following which its chief executive quit.

Many of Abil's problems are a result of its business model and its failure to manage debtors effectively.

While your business model may not be the same as Abil, you too can run into cash flow problems if you fail to manage debtors correctly. To make sure this doesn't happen, use these two tips so you can avoid what African Bank is going through.

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Abil's troubles stem from a business model based solely on unsecured lending, says Reuters

According to Reuters, Abil's troubles come from a business model based solely on unsecured lending – high-margin loans not backed by collateral – which it offered widely to its core market of low-income borrowers. But those clients have been hit by rising unemployment, food and fuel costs, as well as slow growth in Africa's most developed economy – and Abil has been slammed by their bad debts.

While the lender's business model and economic factors may have played a role in its troubles, Abil could have minimised losses by applying good debtor management practices.

To avoid falling into the same trap, use these two tips to manage debtors effectively.

Avoid a similar situation by using these two tips to manage your debtors

#1: Do credit-checks on all potential customers

Don't underestimate risks in your enthusiasm to take on new business, says dynamicbusiness.com.

Do proper credit checks. This is quick and isn't that expensive.

'It's important to establish the correct business title, together with its legal status (i.e., limited company, sole trader etc) before seeking reports from agencies or trade references. Awareness of your customer's financial health can safeguard against unreliable debtors,' says the site.

#2: Collect your debts immediately

Get your debtors to pay your business on time. Send timely invoices so you don't delay their payments.

It's also a good idea to spend a little extra money on debt collection.

Experts behind the Practical Accountancy Loose Leaf Service say if you spend extra money on debt collection, you'll reduce:

  • Bad debt losses;
  • The average collection period; and
  • Interest payable on overdrafts.

Just make sure your administrative and other debt collection costs don't become more than the money you recover.

Let Abil's collapse be a lesson to you when it comes to debtor management. Use these two tips to manage your debtors effectively. For more tips on debtor management, check out the Practical Accountancy Loose Leaf Service.

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