Author
Domenic CalabrettaChief Executive Officer & ASIC Registered Liquidator
Maintaining a strong working relationship with creditors is pivotal to the success of any business. Failure to do so could lead to insurmountable debt and the unwanted threat of liquidation.
Knowing how to deal with creditors is a skill that can be developed very quickly and we will explore numerous reasons why it can be the difference between success and failure. This article provides useful information on how to manage creditors effectively and how to negotiate with creditors for debt settlement when facing financial difficulties.
Why is it important to keep good relationships with creditors?
Keeping a balance between when you need to pay creditors and when you receive payment from debtors such as customers is vital to the cash flow of a business. A well-managed creditor relationship could help you:
- Improve cash flow – Negotiating extended credit terms can reduce the working capital required.
- Provide financial flexibility – Strong relationships can mean access to better terms or emergency extensions.
- Avoid insolvency – Late payments and overdue debts are red flags that can lead creditors to take legal action.
The benefits of developing a trustworthy relationship are sometimes most evident in times of financial difficulty. An inability to pay debts on time or consistently paying them late are among the most obvious signs that a business may be trading insolvent. Creditors may fear that your business is in danger of entering into voluntary administration, or even liquidation.
How to manage creditors effectively
Sticking to fundamental business principles and implementing some basic procedures can help ensure creditors are paid on time. The following is a good starting point:
1. Establish clear payment terms
You should set out a payment agreement with each of your suppliers. A generic policy is essential, but you should alter it for specific suppliers. Most policies require payment within 30 days of the invoice, but it may be beneficial to negotiate 60 or 90 days for larger accounts to ensure that you can pay on time. Explore discount options for early payment and review your terms regularly.
2. Keep accurate financial records
Having accurate and up-to-date bookkeeping allows you to easily identify any outstanding debts and when their due date. It also provides the opportunity to prioritise debts and manage cash flow. Utilising specialist software or professional services such as an accountant is strongly recommended.
3. Foster a relationship
Having strong personal relationships with creditors can be very beneficial. This can be useful at times when you may require a rushed delivery, extended credit, or additional time to pay. Having open and clear lines of communication is ideal.
4. Prioritise key creditors
Some suppliers and creditors will be more crucial to the success of your business than others. This may be due to the importance of the products they provide, or the amount of money spent compared to others. At a minimum, you should identify these creditors and use the above to build strong business relationships with them.
5. Improve accounts receivable
The above should be replicated in all aspects of business, in particular accounts receivable. Receiving payments on time will provide a balanced cash flow and ensure that creditors are paid on time. Invoicing apps are an effective tool for financial essentials including bookkeeping, accounting, cash flow, and taxation.
Learn more about how to stay on top of business finances.
How do you communicate with creditors?
Good communication with creditors is imperative but our focus here will be on how to manage creditors effectively during times of financial difficulty. If you are unable to meet your financial commitments and are in danger of trading insolvent, it is important to initiate contact with creditors rather than wait for them to contact you after things have become an issue. It is best to:
- Explain why you cannot pay on time
- Outline your current financial situation to them
- Detail any other financial obligations you may have
- Discuss your immediate and future income prospects, and
- Explore potential solutions.
Where possible you should visit local creditors in person. Alternatively, a phone discussion is adequate but should be followed up with a letter or email that outlines any new terms that have been agreed upon by the parties involved.
How to negotiate debt with creditors
The foundations for effective negotiation with creditors begin with implementing the communication techniques mentioned above. Prior to contacting a creditor regarding an outstanding debt, you should first determine the exact amount of the debt and the amount you can afford to pay over a periodic period.
When looking at how to negotiate with creditors for debt settlement, consider the following approach:
Step 1: Be Transparent About Your Situation
- Explain the reason for late payments.
- Provide an overview of your financial position.
- Outline when and how you expect cash flow to improve.
Step 2: Propose a Debt Settlement Plan
When looking at how to negotiate with creditors for debt settlement, consider:
- Requesting a waiver or reduction of late fees.
- Returning unused items purchased on credit.
- Setting up a payment plan with smaller, regular payments.
- Deferring payments if future cash flow is expected to improve.
Step 3: Get Agreements in Writing
- Document all discussions and terms agreed upon.
- Be diligent with any mail that you receive – both via post and electronically
- Confirm changes via email or formal contracts to avoid misunderstandings.
If the creditor in question is a lending institution such as a bank, you may be able to:
- Reduce the minimum monthly payment required
- Change your repayment type to interest only for a nominated period until you can resume normal repayments
- Refinance the loan.
What happens if creditors hire debt collectors?
It is always better to deal with creditors rather than debt collectors and this is a mentality that should be maintained throughout negotiations.
If debts remain unpaid, creditors may engage a debt collector or sell the debt to a collection agency. In Australia, debt collectors must follow The Australian Competition & Consumer Commission (ACCC) guidelines that outline what debt collectors can and cannot do.
If you receive contact from a debt collector:
- Do not ignore it – this can lead to legal action.
- Negotiate settlement options – Many collectors will accept partial payments.
- Understand your rights – You are entitled to dispute inaccurate claims.
How can a debt collector settle for less?
The primary aim of a debt collector is to recover all the money owed but creditors are often willing to settle on alternate terms. This is particularly the case for unsecured creditors as they are at the bottom of the list when it comes to getting paid when a company goes into liquidation.
Creditors voluntary liquidation: What it means
If negotiations fail and debts remain unpaid, creditors may take legal steps to recover what they are owed, potentially resulting in subsequent action such as administration or liquidation.
- Administration: Companies that choose voluntary administration often enter a Deed of Company Arrangement (DOCA), which attempts to minimise the impact of insolvency by offering a better return for creditors and helping businesses avoid liquidation.
- Liquidation: Where creditors are unable to come to any agreement, they may decide to apply to the court to initiate liquidation proceedings. Receiving a wind-up notice is the first sign of this, and a failure to act before the specified date may result in your company being liquidated.
Take control of your business finances
Effective creditor management and debt negotiation can mean the difference between financial stability and insolvency. If there are signs that your business is in trouble, taking immediate action will increase the prospects of returning to a position of financial strength.
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