A mentor or advisor is immensely important to your business’s growth, development and success. The right advice from professionals provides peace of mind that things are covered and the company is on the right track to achieve your goals. Two things I have noticed when talking to local business owners regarding advice are:
- many people don’t consider the extent to which advisors or other professionals are acting on their behalf; and
- advisors or other professionals are not directly responsible for the outcome of any advice they provide (or lack of), including any financial loss due to a lack of advice.
Something that has brought this to my attention is when companies have entered into liquidation in the last few years. Several local business owners have lost money as they were unsecured creditors when Tamarind Taranaki, Navigation Homes and several other businesses entered into liquidation. Losses have collectively totalled well over a million dollars for local operators and the Taranaki business community. How much better would our region be if local operators who work hard for their money got paid over a million dollars, then this flowed onto everyone else like local suppliers, contractors, small businesses and shops? And when you consider these businesses all had advisors and professional advice, it raises the question, who is responsible for getting good terms and conditions of trade and Personal Property Securities Registrations (PPSR) in place to protect local operators?
The answer to many has been Debt Free, with many happy clients and comments like ”where have you been?” and “we need more people like you”. We specialise in terms and conditions of trade, and to add additional value, we offer assistance with credit checking, account monitoring and PPSR services at no expense to help local operators avoid future losses. When you work with us, you will be safer in business with rock solid business documentation that is up to date, know about credit checking services and the PPSR and be utilising these excellent tools when appropriate. Getting the right advice is paramount in business, as is ensuring the extent of any services are clearly understood.
In the past few weeks, I have learned a few things and seen a few things that others should know! I have learned that in 16 years of providing debt collection and debt prevention systems to my clients in the Bay of Plenty, I have become very good at it and that the value that I can bring to my clients in this area is, by all available evidence, unparalleled.
In saying this, I do not mean to be immodest or arrogant. It is simply a fact. Since Feb 2007 I have met with, on average, three businesses a day for 16 years, each with their struggles, USPs, niches, styles and approaches, meaning that I have listened to 11,745 scenarios from nearly every industry and when I say almost every industry let me give you a snapshot of one day: In the morning I was meeting with an $800 per hour commercial lawyer in a plush CBD office, mid-morning I was in a Kohanga discussing errant accounts, and in the afternoon I was in a dairy shed with a man who manufacturers synthetic cow vaginas for the artificial insemination industry discussing how to create terms of trade to protect his business.
For each industry I work with, I research the transactional nature of the industry, the legislative requirements and the most common points of contention in those industries. If I am to be trusted by these clients to protect them, I ensure that I do just that. The amount of work that I do and have put in to become an expert in my field has given me enormous respect for other professionals that do the same, often as trusted advisors, we are asked to weigh in on various business issues (I was once even asked to be a guest lecturer at a polytech to speak about marketing because they were impressed with my credit management knowledge!)
It is then our opportunity to show professional courtesy to our fellow advisors and say that ultimate line, “Unfortunately, I am not an expert on that issue, but I know just the person who is, and I’m sure they would be happy to discuss that with you”. I have heard so many advisors bluff and blunder through giving advice that they have no place giving simply because they feel that saying “I don’t know” will cause them to lose face. Deferring to a true subject matter expert shows ultimate respect for your client and the expert you refer to, strengthening both relationships!
There is no shame in holding your client’s well-being above your pride! It is the difference between a functionary and a trusted advisor, I know which one I would rather be.
Without exception, a lack of passion is the number one thing I have seen that leads to a lack of success in business, which is a snowball effect. A demanding client, job or financial stress can test your resolve and your passion, making your job even less enjoyable, again decreasing your passion. In contrast, a passionate person’s effort and willingness creates success, reinforcing and igniting their motivation.
Being part of the passionate Debt Free team is unique because we all genuinely care about our clients and understand the enormous value we can provide. The business documentation, credit checking, security interest and debt recovery services we provide make a massive difference. We help business owners focus on the activity they got into business to do and are passionate about. No one thought, “I love building or electrical work, I can’t wait until I can do lots of paperwork and chase debtors”.
To be passionate about something, you need to believe in it. Whatever it is that you do, you need to see the benefit. If you provide insurance, read articles on families left homeless and penniless after an accident with no insurance. If you help people with tyres, read about stopping distances and the difference that good tyres make in saving lives. Once you see yourself as the holder of the solution to a very serious issue, the passion will ignite, and you will see the results.
People say, “passion isn’t everything, you need skill and knowledge” – yes, that’s true, but how much easier is it to learn a skill or gain knowledge in an area when you are passionate about it. And if my passion ever wavers, all I have to do is call up one of my existing clients and ask, “how has your interaction with Debt Free and myself improved your business?” and I’m back on fire again.
Of all the debt situations I see in my role, one of the more troubling yet increasingly common occurrences is friend and family debts. These seem more prevalent in the trades, but we see them across all industries. This kind of debt has a particular set of challenges that we see time and time again. These are emotional leverage, lack of documentation and lack of adherence to policy. In this article, we look at why these are often not conducive to good business.
With friend and family transactions, the work done is often unquoted as there is a feeling of “they will look after me”, and usually, when the invoice arrives, and it is more than was expected, the trouble begins. Not having a quote, or better yet, a range of quotes means there is no defined value of work. Therefore, how can a “good deal” be ascertained? Being able to accurately assess the value of work done after the fact, especially without market comparisons, is very difficult. Auditors and quantity surveyors train for years to be able to do this, and still, cost overruns and miscalculations often occur with this level of expertise. How can a layperson be competent to know whether their mate “Bob” has looked after them or fleeced them? In cases like this, it often depends on the mood or current state of the relationship.
No matter how selfless or generous a person is, we all have a ledger in our heads of favours done for and received from friends and family, often the view on the “deal “ received has more to do with the state of this ‘ledger’ rather than the actual value received. When preparing clients for disputes tribunal hearings against friends and family, it is always a struggle to focus on the situation at hand without “well, I gave him this ( water blaster/car part/ trailer), so should we mention that?
If a quote and terms are received and accepted, all of this is removed from the situation, and it doesn’t have to severely affect or even destroy the relationship. In larger organisations with dedicated accounts or credit management staff, we see accounts for friends and family of the owners or directors sitting outside the standard credit procedure for fear of offending the debtor or their friend and family within the organisation. Depending on their involvement in the credit management procedure, the first time that the director or owner hears of the overdue account it could be 60 or 90 days down the track, making for a more uncomfortable conversation than is necessary as the debtor may not have received any reminders that could have resolved the issue.
So, in summary, if you keep business and friendship separate, you should be able to keep one without it being at the expense of the other.
At the start of February, I spoke to a client I had visited in December of the previous year due to a debt issue. The client had weak terms of trade at the time that were rehashed from an old set the previous owners had left behind. They were inadequate and failed to protect the business in critical areas that it had exposure due to dealing with new customers. I quickly ended the policy of extending $5,000-$10,000 credit on a verbal agreement over the phone and helped to implement terms of trade, Personal Property Security Registrations (PPSR) and credit checking processes for the business.
The client decided in December to make his business more professional, make his company a lot more secure and make his job in business a whole lot easier. He took his initiative and saw a chance to add value to his business, and comprehensive terms of trade and being a secured creditor through the PPSR did just that.
I emphasise the decision made in December because that decision made a month prior saved him $25,000. In January, a company had attempted to not pay $10,000, which our implemented terms of trade and effective collection process solved at no expense to our client due to the legal ability to on-charge the debt costs. In the same month, a company had entered into liquidation owing $15,000 to our client, which was paid in full from the liquidator due to being a secured creditor.
Speaking together, we agreed that he needed to put things in place when he did and that being $25,000 better off was much better than losing the money. I am thrilled with this outcome and can’t stress the importance of getting comprehensive, industry-specific terms and conditions of trade in place while things are going well in business.
After 13 years in the credit management and investigations field, I have found that there are certain financial levels that are dependent on the debtor’s relationship with the creditor. I often hear from creditors, ” I’m sure he will pay. He is a mate”, or “I never expected this from her, seeing as we are family” then, when I see the amount, it will generally fall into a familiar range.
I have observed that otherwise seemingly honest debtors will be willing to sacrifice a friendship for no less than $2500 and a familial relationship for no less than $10,000. What makes these deceptions easier and the event more frequent as well as harder to remedy is that the closer the relationship, the less likely the parties are to have a binding written agreement between them, even in cases of one party personally guaranteeing a loan for the other from an institutional lender (usually auto loans), in this case, the lender normally has a rock solid agreement that binds the guarantor to the debt but in cases that there is no agreement between the principal debtor and the guarantor the cost and difficulty of resolving the debt are multiplied.
The lack of documentation also serves another negative purpose, it removes the right to register a legally valid credit default that will impact the debtor’s ability to access lending in the future, which makes friends and family lending more likely, perpetuating the cycle. The only way to enforce these unwritten agreements and be able to default list is to obtain a legal judgement (often at the creditor’s cost), this is all well and good, but if you consider that the debtor has already ignored their obligations to a party that they have an outside relationship with how likely are they to comply with a faceless organisation or a legal administrative office?
What private lenders must remember is that familiarity does not always equal importance in the debtor’s mind, and the closer the relationship often, the more likely the lender is to “write off” the debt in deference to the relationship. Also, there is death to consider, undocumented loans are often the subject of estate litigation, if any readers have been involved in such litigation in their lives, they will know that this often spells the end of any retrievable relationship. In my experience, success in such litigation is significantly compromised if the debtor claims that the “loan” was indeed a “gift” the unwritten intentions of those who have passed away are, in my experience, impossible to prove beyond a doubt.
A somewhat tricky or uncomfortable conversation at the start of a loan will always be easier to handle while both parties are on good terms and the debtor is more interested in getting the funds than being offended by a piece of paper. And as I always say, if they won’t sign, they won’t pay.
Two important things happen when you say to your client I need you to sign or agree to our terms and conditions of trade:
- you are viewed as professional: your clients now see you as a business owner who has gone to the effort of setting up business documentation with correct legislation to protect clients and yourself. Your clients respect you, and they are clear on what you expect;
- a commitment is formed: when someone signs Your terms of trade, they are committing to the project, payment and agreeing upon your terms, including any outcomes that may arise.
Beyond these two benefits, commitment on paper to your business documentation has a ‘superman and kryptonite’ effect on problematic clients. Bringing out your terms of trade is a great way to avoid issues in the first place, as most people who are going to cause you problems, dispute or be slow on payment will know what business documentation is and why all major companies use this – because you can’t escape paying the bill.
Due to the psychology involved with signing a Terms of Trade (knowing there will be consequences), problematic clients will look elsewhere to greener pastures or the unsuspecting local competitor who will do the job on a handshake and deal with the problems at the other end when payment is due.
If you are a business owner who wants to take control and have a smart, secure and smoothly run business, contact Debt Free to talk about getting the correct documentation in place for your business, as when someone signs your terms of trade, they are then fully committed, just like you are.
These immortal words contained within Kenny Roger’s 1978 hit song ‘The Gambler’ may not have been written about business, but the words certainly have relevance to the business landscape at this time. Our national attitude of perseverance and determination is a real source of pride for us as kiwis, but when pushed too far, this attitude can be dangerous and sometimes fatal.
As a credit consultant, I am often called in too late to a business where the wheels have fallen off, and the hubs, axles, and chassis are dragging on the ground. Undeterred, the owner tells me that if they could only get a bit of funding, they would be able to get through the struggle and make the business great again. Now there are instances where this is true – for example when an unforeseen event like Covid or an earthquake occurs, and the “business as usual” model is not practical for some time. In many cases, this is not so, and the short-term fix will not correct the long-term problems. Systemic business issues will often be more evident in times of stress or turmoil, highlighting problems already there.
The solution isn’t always working more, rather than analysing and addressing the issues, business owners often think they need to work more and find more clients. If your business issues are ones such as miscalculated margins or poorly managed projects, these will only be made worse by volume. Upscaling profits and upscaling problems often look the same from an input perspective but are vastly different from an output one if the underlying issues are not found and corrected.
Having an impartial business advisor or mentor periodically look over your systems and processes could point out these problem areas before they become business killers. Often, however, I am called in after the issues have grown into monsters and the overworked owner is putting massive effort into putting out fires, and a decision must be made. Do they carry on working themselves half to death until someone else, such as the IRD or an unpaid creditor, decides it is time for them to stop through a liquidation? Or do they pause, see the situation for what it is and make an exit plan that leaves them intact from a financial and reputation perspective. In business, people have long memories and bowing out gracefully without a legion of unpaid creditors and crippling personal debt is much easier to come back from than the alternative.
Loans given to struggling businesses are nearly always very high in interest. Given the probably insolvent position of the applicant business, loans will be secured with, at the very least, a personal guarantee and probably a security over personal assets such as property. I have seen business owners lose houses, go bankrupt, and ruin their lives. I have even seen a few unfortunate cases where the business owners took their own lives for simply not knowing when to call it quits.
If you are ever in the position where the options are to cease business or go all in with everything you have, take some time with an independent advisor that can give you the cold hard facts regarding the business’ real-world chances of survival before you leap. Your life may very well depend on it. Just a thought.
The Personal Property Securities Register (PPSR) of 2002 brought a whole new opportunity for business owners or creditors. A chance to be paid in full before other creditors, which is an amazing benefit, however, there is a downside if you do not utilise this opportunity and sit as a default unsecured creditor.
Something that is not widely known is a liquidator’s right to challenge money back off businesses who sit as default unsecured creditors (voidable transactions) when they are paid from a client up to 6 months before they enter into liquidation (sometimes two years). That’s right, a client can pay you and then months later, you can receive a letter from a liquidator asking you to pay the money back. This is because of the chance that the unsecured creditor would receive more money than they would in the normal liquidation process, therefore making it unfair for other creditors who are secured and have utilised the PPSR. There is a valid and just cause; to stop businesses from paying out associates, friends or companies that have a personal guarantee before insolvency and to allow funds to be distributed among creditors more fairly when liquidations happen.
Like all things, there are positives and negatives to this situation. Liquidations are now handled far more ethically as there is no way for creditors to get lucky and get payment due to the timing of the invoice. However, if you are an unsecured creditor, you will most likely not get paid much, if at all, and are exposed to having the money you have already been paid challenged.
It is about having up-to-date business documentation and PPS Registrations in place with your commercial clients to ensure you get paid for your work but also aren’t open to having recently paid invoices challenged by a liquidator. Never before the introduction of the PPSR have business owners had this opportunity. Beforehand there was no way to secure your invoice value in the event of insolvency, so this should be approached as a positive, and it comes down to a simple saying with the PPSR, “use it or lose it”.
I had a meeting last week with an earthworks company, and one of their comments was that I don’t need terms of trade or to be a secured creditor because I only deal with large construction companies! My response was, “remember Mainzeal, Ebert, Orange H, weren’t they also large construction companies? Being a small supplier to a large company doesn’t make you safer it simply makes you part of a larger group, be that a large group that gets paid or doesn’t get paid remains to be seen.
The other main risk I have seen with small subcontractors working exclusively with one large client on a large project is that to secure the work, there are often multiple tenders or bids. To have a good chance of success amongst many competitors, the bids are often at a very low margin with the hope that the quantity of work will make up for the lower margin. In my experience, a low margin is a low margin irrespective of the job size. With it comes the risk of unexpected costs and unforeseen difficulties, making a low margin situation a no margin situation.
Another is that many of the subcontractor agreements that the large companies have the subcontractors sign are blatantly one-sided and because the company may have done hundreds of these types of projects, you better believe that every single clause in the contract is there to protect the company from loss and is based on something that does and has happened. Loss never disappears, it is always experienced by someone, and these companies hire professionals whose entire role is to ensure that it is not the company.
A few months ago, I read this clause in a subcontractor agreement that a client had been asked to sign ” the contractor agrees that they will not increase the quoted price irrespective of changes made to plans, specifications or requirements”. Agreeing to this would be ill-advised and could be financial suicide. Now I’m not saying that just because a construction company is large, they are in some way unethical or predatory, but in a situation where something unforeseen happens that impacts the potential profit of a job, it is essential that both parties are on the bus, not one driving and one underneath. When one of the largest and oldest companies in New Zealand history can lose more than $100m on a single job, it shows that it can happen to anyone.
Entering into unsecured, unequal agreements to get the work is similar to playing rugby against a team when only one of you has a set of goalposts. They also have the referee on the payroll or getting married, and only one party writes the vows (goodness, only knows what I would have agreed to if my wife wrote our vows!). If the only difference I ever make to a business is making them a secured creditor and helping them enter more equal contractual relationships, I would consider my involvement a success.
