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Stuck with a Bad Debt? Uplift your Debt Recovery Process

Vinni Mittal 
on 19 November 2020

LinkedIn


Debt Recovery

Debt recovery is a problem that mostly occurs if you do not enforce credit terms on your consumers. Research has shown that more than 85% of small businesses experience cash flow problems. Thus, it is very important for your business to be prepared all the time to collect bad debt quickly and effectively and as soon as possible. Thus here we are sharing a few important tips that might help you to speed up your debt recovery process.

Make sure customers agree to your credit terms

To swiftly collect your outstanding debt amount, you will need to make sure that you are well prepared with all the details of the business transactions. To do this, you must make sure that you have several pending invoices, dues, and purchase orders with you before proceeding with your debt collection. Before signing and entering into a commercial transaction or a loan agreement, you must ensure that your trading terms and conditions need to be signed and agreed upon before trading transactions occur. This must be done irrespective of the terms and conditions of the business transaction, the responsibilities, liabilities, and expectations of all the parties that have been clearly and specifically illustrated and are, in a written agreement given to do business simultaneously. Failure in preparing the terms of your exchange means that you can be left with the conditions set by the party with whom you are doing business with. If you work with the terms and conditions of the debtor, you will rarely have any advantage.

Solutions for excuses from debtors

Being confident in your negotiation is the key to recovering a debt. Being prepared with pre-built answers and reasons, common questions or excuses can help in building your confidence, and any negotiation between you and the debtor allows you to have focus and control of the negotiation. Be prepared with the facts, records, reasons, and arguments and a clear understanding of the customer’s history before you call them.

Take Care of your Cash Flow

As long as a business exists, expenses will exist. However, during tough times, it can be extremely difficult to keep the cash flowing in. Cash flow is the lifeblood of your business, and to keep your business healthy, cash needs to continue flowing through. No matter how tough times get, having cash-flow out of your business will never be a problem.

One must recession-proof his business by implementing strategies to keep the cash flows moving. 

One way to monitor your cash flow is to recover your pending debts from all your debtors. As the current pandemic has caused the market to crumble, thereby every business enterprise will have a short of cash flow and thereby increasing the chances of turning the debt into bad debt. It is better to collect all your debts from the market, as the ongoing market crisis may cause many of the business ventures to go into liquidation. If the company goes into liquidation, creditors fall under the category of operational creditors. 

Further, under the waterfall structure for distribution of assets, an operational creditor comes at the bottom of the hierarchy. They have zero liquidation values and no resolution professional, cares for the operational creditor dues, even though the resolution plan has to mandatorily comply with the applicable provisions of the Act. However, the prevailing notion seems to be that a resolution plan has to comply with no law except the IBC and promoters are using this prevailing mindset to the hilt.

Stuck with a Bad Debt  Uplift your Debt Recovery Process

6 Ways to recover your Debt 

1) Code of Civil Procedure, 1908 - A summary suit can be filed for recovery of money for speedy disposal of cases.

For initiation of the Summary suit, the debt amount must not exceed Rs. 10,00,000/-, and there must be a written contract between the parties.

2) Negotiable Instruments Act, 1881 - This Act is applicable to cases for the dishonor of cheques. Under Section 138 for the dishonor of bill of exchange or promissory note. Issue of Legal notice is the primary step thereafter proceedings are initiated.

3) Recovery of Debts Due to Banks and Financial Institutions (RDDBFI Act), 1993 - This Act becomes applicable to the aggrieved parties if the aggrieved party is a financial institution like a bank or any private financial corporation like NBFC whose debt is due and wants to recover their debt from an Individual.

4) Indian Contract Act, 1873 - Indian Contract Act has laid down certain provisions as to safeguard the parties which are coming to consensus ad idem over an agreement, and to avoid the dishonor of a contract thereto. These sections can be invoked based upon the facts and circumstances of the case.

5) Arbitration and Conciliation Act, 1996 - Whenever there is an arbitration clause in the agreement, and the parties concern wish to settle the matter through arbitration for resolution of the dispute, Section 7 of Arbitration and conciliation Act may be invoked for an out of court amicable settlement through arbitration. 

 

6) Disputes Resolution under MSME - In case of disputes with regard to any amount due because of delayed payment:

The enterprises under the provisions of this act may refer to the Micro and Small Enterprises Facilitation Council which would further conduct conciliation and arbitration in the matter, where the conciliation or arbitration is initiated and stands terminated or unsuccessful without any settlement between the parties the council shall either by itself will take up the dispute for arbitration or refer the matter to any institution or provide alternate dispute resolution service.

The Micro and Small Enterprises Facilitation Council provides an alternate dispute resolution mechanism that may have the same jurisdiction to act as an arbitrator under this section in a dispute between the supplier located within the jurisdiction and a buyer located anywhere within India.

The act also has a provision that every reference made under this section shall be decided within a period of 90 days from the date of making the reference.

Important  tips for Successful Debt recovery

These tips can help you to be prepared in a better way.

Debt collections happen in almost every operating business. They are just a part of the business landscape. Today, in every industry, there are good ways and bad ways to perform debt collections. Here are some ways to increase your success.

Be Prepared - Before you make the initial contact with a delinquent customer, make sure you know everything you can about the customer. Try to make copies of all invoices, contracts, and any other information that will help you speak knowledgeably, professionally, and personally with the customer.

 

Document Everything - When you are in a conversation with a customer about outstanding debts, be careful and take notes about everything that was discussed, including the customer’s comments in case there is a future debt dispute. If your company has a facility of any tracking software, input everything into the system while the conversation is fresh in your mind. Every time you have a conversation with the customer, continue to add any additional details to your file to keep it as up-to-date as possible.

Don’t Assume Anything - When making your initial call, quickly make sure that the debt has in fact not been paid. Don’t alienate the customer. Always remember, there may be a potential of having a future business with the customer. The debt in question could be an unforeseen mistake and not an actual collection problem at all. Be careful with your tone and your words at this point. Be patient and listen to what the customer has to say in his defense, and be sure to document the interaction carefully and accurately.

Be Pleasant and Control Yourself - The tone you take with your voice can impact how successful the conversation will be. If you start off the conversation with a friendly, non-confrontational tone, the customer may respond more positively. Once you have confirmed that you are speaking to the correct person about the unpaid invoice, ask if you can do anything to help. Ask if they need any additional information. If you act like you care or can understand the debtor’s side of the story, you may be able to prevent the person from becoming defensive. However, remain detached from the situation. Your primary job in debt collections is ultimately to collect the pending debt in full as soon as possible.

Avoid Confrontation and Manipulation - Attempt to find out if the debtor’s excuse for not paying is legitimate. For example, if the person blames the non-payment due to someone else, confirm the same is true or false by contacting the respective person. Listen carefully to what the person is telling you, and get a sense of whether the person is being honest with you. Often, your gut feeling will be right on.

Put a Stop to Anger or Harassment - Always be calm even if the debtor becomes abusive during the conversation. If such a situation occurs, you might suggest him to call back later. No matter what is the situation, always keep yourself in control and listen carefully to what the customer tells you and try to keep the dialogue constructive as much as you can. It’s important to let the debtor feel he is making progress.

Give Options - If a customer is having trouble paying off debt, it might be possible for him to make payments over time. Try to work out a plan that will work for both the customer and your client. The final goal is to get the customer to make the entire payment of debt as quickly as possible. Listen carefully and try to offer options until and unless something workable is defined.

Recap the Terms - Once a payment plan has been agreed to, verbally summarize the plan for the debtor. This summary should include specifics of when the debtor will send each payment, and what form of payment will be used. Ask the debtor to call or email you once payment has been sent.

Keep Communicating - Even if the debtor can’t pay right away, it is always important to keep communications going. He may be able to pay in the future, and by talking to the debtor and really listening to what he has to say, you may be able to help him figure out a way to start paying sooner. The older the debt becomes, the harder it is to collect, but sometimes circumstances do change and payment may become possible.

Debt recovery is common, especially in difficult economic times such as the present crisis due to the pandemic. Using these collection techniques one should increase their odds of success in recovering the debt.

Control with flexibility, clear expectations, and record-keeping

In case you ever need to file a complaint with the adjudicating authority, it is very important that you have clear and concise records of actions and events as evidence that will be presented during the proceeding for the court’s decision. There is no magic wand for recovery of bad debt, each debtor, and each situation is different. We always recommend that you must listen carefully to understanding and solving the debtor’s problems with payment.

Employ debt collectors for bad debt recovery

The debt collection agency (MUDS LEGAL LLP) is well trained in all of the above and there is a clear collection process for collecting loans on their behalf immediately and effectively. Some companies have a lack of confidence to argue about the recovery of debt, especially small business owners and enterprises who cannot be experts in some areas. With more than 85% of companies experiencing cash flow problems, it is very important that your company operate with full confidence and with positive and ample cash flow. Otherwise, you may have to face consequences and that will affect the overall welfare of your business.


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