At LCollect we believe that knowledge is power. Every month our debt collection blog gives you practical tips, stories and news from around Australia and the world.
It's a question that we come across on a regular basis from our commercial clients and one that is more common than you may think.
Interest is the price (charge) paid for the use of someone else's money. For commercial clients, it is a charge that your clients pay when they don't pay that your invoice by the due date. When they don't pay you on the due date, they are effectively borrowing money from your organisation.
While those in the finance industry often have very well worded Contracts and Terms and Conditions that allow the calculation of an annual percentage rate (APR) many small business owners struggle to understand the requirements and while they understand the practical value of incurring interest they worry about the practicalities of applying additional interest fees or charges to an outstanding account.
The short answer to this question is yes provided your terms and conditions permit it. There are however strict requirements you must meet in order for your claim for interest to be legally collectable, and we would recommend you seek legal advice to ensure your interest charges are recoverable.
A fair and reasonable rate can be difficult to determine however most businesses charge between 5% to 10% per annum. The interest charge should be at a rate that is a genuine estimate of the cost of the late payment to your business (ie your banks overdraft rate). Anything higher than this may not be enforceable.The Local Court of NSW currently prescribes a pre-Judgment interest rate of 5.50%. This rate is 4.00% above the cash rate last published by the Reserve Bank of Australia and is reviewed every 6 months. The current rates can be found at Interest Rates Applicable After 1 July 2010.
Charging interest to a debt can have pros and cons, and is ultimately a commercial decision. Where a customer knows that interest may be charged on an overdue account or invoice it is often incentive enough for them to pay on time. On the other hand you may alienate a particular customer who may take their business elsewhere. While you may offer a better product or service than your competitor, applying interest to a debt could be the very reason you lose business.In a situation like this it is often better to communicate to your customer that their payment is late and granting an extension for payment before charging interest and being flexible enough to agree to waive these charges if a customer can be retained.
For some, picking up the phone to ask people for money doesn't come naturally and them out of their comfort zone. They don't feel confident with the process and fear embarrassment or failure.
Take your time to read through any relevant notes that you may hold and make a quick summary before the call including details of the product / service provided, the amount owed, the current arrears, details of the last payment and / or the payment due date and any reasons for non-payment that have been offered up before. Having a very basic fact sheet allows you to control the call. You want the call to flow seamlessly so the conversation doesn't get sidetracked by a question you can't answer.
Also know exactly who you are calling, and we don't mean the customer personally as such;
As you are aware the National Consumer Credit Protection Act 2009 ("NCCPA") dictates that in a majority of cases you are required to issue a Notice pursuant to s88 and s92.
This Notice advises the customer of their Default and subsequently what is required to remedy the Default and the time-frame in which they have to comply with the Notice. We have seen, over the years, a number of accounts where a Judgment has been obtained only for a further Default Notice to be issued.
What is the impact of this on the debt collection process?
Once the customer has failed to satisfy the Default Notice refer to the Acceleration Clause within the Notice that specifically states:
"..... your liabilities under the Credit Contract will be affected by the Acceleration Clause in the Credit Contract which means you will then have to pay us immediately all moneys owing under the Credit Contract"
Effectively if you were to issue a further Default Notice you are giving the customer a further 35 days in which to remedy any Default. During this period no enforcement action can be taken in which to recover the debt including enforcing a Judgment in the Court.
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We often come across examples where requests are made to our office for the issue of Default Notices. Having reviewed the request we then find that the same debtors have been issued with the same Notices several times over the course of their loan.
Effectively as a Creditor you are teaching the debtor to pay upon receipt of the Default Notice and not as their Contract stipulates. The debtor will often make contact, make arrangements to clear the arrears however fall into arrears again. The next month you will be issuing another Default Notice, the debtor will contact and make an arrangement and the cycle continues. As a Creditor how can you end this cycle and take control of the account?
Under Section 94 of the National Consumer Credit Protection Act 2009 the debtor can propose an application, verbally or in writing, to postpone action under a Section 88 or Section 90 (i.e. they make an arrangement to clear the arrears). The application must be made by the debtor prior to the s88 or s90 Notice expiring.
As the Creditor you must respond to the request made by the debtor within 21 days of the application and advise of the decision, either accepting or declining the application, the name of their relevant EDR scheme and the debtors rights under the scheme.
What happens though if you wish to accept the debtors proposal but don't want to get caught in the cycle of issuing another Default Notice?
As a Creditor you can issue a Section 95 Notice of Postponement under the Act.
This Notice indicates to the debtor the conditions of the postponement and advises the debtor that the Creditor is not required to give any further Default Notice under the NCCP Act. The Notice however only applies to the debtor that originally negotiated the postponement and does not apply to other debtors, mortgagors or guarantors under the Contract unless these parties have consented to the negotiated postponement.
You can find out more about this service by contacting us.
It is important to note that this guide to debt collection applies to debt collection agencies, in-house collection departments, Government agencies, Solicitors and others. It is not uncommon for internal collection departments or Solicitors to tell us that this debt collection guide does not apply to them. We refer them to page 1 of the Debt Collection Guideline.
In a previous draft of the guide, debt collection contact hours for telephone contact had been significantly reduced. The new guide to debt collection contact hours are not the same as the draft after many industry concerns were flagged with the regulators.
The updated guide goes through court prosecutions that occurred since the last publication that give good examples of breaches of the Competition and Consumer Act and collection practices that should not be followed.
The emergence of social media is and emerging technologies is also dealt with. We note that it can be difficult to "future proof" such a Guideline at the rate of technological changes we have been seeing, It is important to stick to the core principles underpinning the Guide to Collection when dealing with these new spaces.
For your reference a copy of the guide available for download here.
The importance of internal processes and procedures that are correct when a debt is written off before being outsourced for collection cannot be emphasised enough.
In 3 similar examples of consumer credit files, involving 3 different lenders, the security interest was made void on the PPSR (Personal Property Security Register) through their actions. In one of the examples, upon being referred a written off debt for collection we were no longer able to collect the debt at all because of our clients actions.
In the most extreme example of what can go wrong in the collection of a debt, upon receipt of a new debt to collect it was noted that debt was secured by a motor vehicle The PPSR reflected our clients interest correctly. We repossessed the security 6 days later. Having waited for the Notice After Taking Possession of Mortgaged Goods to expire, we sought to sell the vehicle through an auction house. The auction house notified us that our client's interest was not listed on the PPSR.
We were concerned this was some form of error and immediately checked the PPSR and with our client what had happened. The collections manager informed us that they had done nothing to remove the PPSR listing. However, digging a bit further it was discovered that when a file is written off to a zero balance a report is generated for the loans team for zero balance loan accounts. This report then goes to an operator who is responsible for updating and removing listings on the PPSR. The listing is then subsequently removed, as it was in this case. Once a PPSR listing is removed the security is lost.
It got worse. The debtor was under a Part IX Debt Agreement. Our client was not part of the Part IX because of the security interest. In addition to removing the PPSR listing, a paid in full letter was issued to the debtor. The debtor subsequently forwarded this to the Trustee.
Putting this example into monetary values;
Generally, the three examples of our clients removing their PPSR interest have some form of the following processes in place;
We are aware that some of our clients have additional steps in place to prevent this from occurring which include;
As with any progressive businesses with growth aspirations, the importance of strong cash flow in Professional Service organisations should not be underestimated. In particular, the two elements of credit control and debt collection play critical roles in maintaining strong cash flow.
This article aims to provide guidance on the processes required for credit control and debt collection within the professional services sector. It can be used as a starting point that organisations can then use to develop a framework for maintaining strong cash flows.
Before professional services organisations can design an effective credit control and debt collection process, they must first understand the different levels of risk arrears within their existing client base. This will require a ‘Risk Analysis’ approach to collections that which will be unique to every organisation.
Once the client base has been categorised by risk profile then the next step is to develop strategies for ‘Preventative Action’ - to limit the quantity of accounts that fall into arrears. And ‘Targeted Actions’ – That ensure the relationship is maintained whilst payments are swiftly collected.
We’ve outlined some possible risks Professional Services organisations may encounter when reviewing their client base and accounts that are in arrears. The list is by no means exhaustive and should be used as a starting point in developing a process.
In the above class of client, the overall risk of non-payment is relatively small. However, given the potentially large nature of the client business and relatively large payment due in relation to a smaller suppliers overall revenue (say 5% of total revenue). When payment is withheld or delayed then the effects could be potentially catastrophic and further compounded where margins are small.
Given the high failure rate of new small businesses, it’s safe to say that they carry a high risk of defaulting on agreed payment terms. It’s unfortunate, but the catch phrase ‘small businesses don’t plan to fail they just fail to plan’ falls true, too often with this category of client.
A good example of this type of organisation being within the ‘Building and Construction’ Industry. This sector has one of the highest rates of Insolvency, which in turn may attract a high risk profile for your organisation.
These clients have historically had an excellent reputation for paying their debts. However your trading terms may not be able to be met owing to timing of the farmers income.
Working for individuals often means dealing with a large volume of clients with relatively low invoice values in relation to an organisations overall revenue as is the case of certain types of Law firms, Accounting and Health Practices. At a macro level you might assign a low level of risk to a client where the invoice exposure makes up less than 1% of Gross Income.
When assigning a risk rating to individuals and corporate clients, it’s worth noting that Banks, Building Societies and Credit Unions have very robust systems in addition they have access to data that allows them to rate and apply a risk pricing ( i.e., Credit Card Interest Rates). These tools are often unavailable to regular businesses when applying trading terms.
With the Privacy Act amendments commencing in March 2014, it is worthwhile reviewing how the Privacy Act impacts on the debt collection cycle and the compliance requirements it brings.
An important debt collection tool that many organisations have as part of their debt recovery process is the notification of default information to a Credit Reporting Bureau when a loan is in default. Section 6Q of the Privacy Act defines consumer credit defaults.
In collections, a credit listing is one of the best debt collections tools available. Where properly explained to people in arrears, it often yields a positive result. However, we would urge you to contact us or Collection Law Partners before listing a mortgage that is in arrears. This can have negative impacts on your debt cycle down the track.
A 6Q Notice must be issued if you intend to disclose information about a default to a Credit Reporting Bureau as part of your debt collection process. You must issue a new 6Q Notice where a full balance is due and payable if the previously issued notice was only for an arrears balance. This is likely the case where your organisation has incorporated the requirements of the 6Q Notice into the Section 88 Default Notice.
The next step before a default can be listed in the debt recovery process is to issue a Section 21D Notice. Unlike a 6Q Notice, a 21D Notice cannot be incorporated into another notice, and must be issued on its own. It is a notice that states you intend to disclose default information to a credit reporting body. The amounts stated in a 21D Notice must be over 60 days in arrears.
14 days after issuing a 21D Notice you can report the defaults stated in the notice to a Credit Reporting Bureau. If you have not reported the default after 3 months, you must issue another 21D Notice to report these defaults.
A possible simplified time frame for the issuing of notices for in consumer credit debt collection matter with an acceleration clause is outlined below.
Please note we make every effort to ensure this information is correct, however it should not be relied upon and does not constitute legal advice. As LCollect is not a lender, we do not have access to this section of the Credit Reporting Bureau's database.