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.