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Four ways to protect your company from debtors going insolvent

by , 30 August 2013
Insolvency comes about when a person is unable meet their financial commitments on a day-to-day basis. And have insufficient assets to either sell to raise money to meet these commitments. As a creditor, you're particularly vulnerable to the consequences of someone else's insolvency when they're unable to honour the credit agreement. And the big question is: How then do you as a creditor protect yourself from the possible insolvency of someone who owes you money? Read on to find out...

The truth is most people generally enter into credit agreements in good faith, in the honest belief they'll be in a position to meet their obligations under such agreements for the entire duration thereof, says the Practical Tax Loose Leaf Service.

Unfortunately for such people, circumstances or poor decisions can sometimes put them in a position where this isn't always possible.

This is why South African laws provide for an orderly manner in which assets can be realised and claims settled.

But in such instances, claims are seldom settled in full. And, in extreme cases, as a creditor you could be called upon to contribute towards costs!

So the question is: How then do you protect your company from the possible insolvency of someone who owes you money?

The answer is to be smarter when granting credit.

Are you a creditor? If so, use these measures to protect your company from someone else's insolvency

#1: Get your customer to complete an application form

There's nothing more disheartening than doing hours of work, only to find that once the work is done, you can't trace the person for whom the work was completed.

So get as many details as you can and check the details supplied.

It may sound like an invasion of privacy, but remember that the person wanting to do business with you is soliciting your trust when it comes to payment, says the Practical Tax Loose Leaf Service.

#2: Do background checks. If granting credit forms a major part of your business, subscribing to the online services offered by the major credit bureau is a good investment.

These services include a comprehensive report of the person's credit history, as well as instances where other providers have done a credit check. This could be useful in determining whether or not the person is a good payer.

#3: Request a deposit. Most businesses in the home improvement industry require a deposit of anything 30% to 50% of the quoted price before they lift a finger.

Do the same – no matter what industry you're in.

With this method, you know that at least if the person doesn't pay the balance, you received enough money from them (hopefully) to cover your costs.

#4: Check the source of referrals. If someone you know is dubious in his business dealings refers potential clients to you, what are the chances that such referrals are equally dubious? In many cases, fairly strong. So watch out!

While the measures outlined can't provide an absolute guarantee that your company will never lose money, they'll assist you to cut your losses down to a minimum.

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