The following case studies show how a little bit of research about a customer before you offer credit can save a lot of problems later on.
Lies & More Lies
A client, who has lost money in the past from customers who have been extended credit but have subsequently failed to pay outstanding amounts owing, now regularly engages us to verify the information supplied by customers in their credit application forms. This helps them to make an informed decision about the risks in supplying credit to new customers.
The client is quite often amazed at how often people blatantly lie on their credit application forms – probably presuming that no one will bother to check the details.
Some customers, on completion of their credit application forms, seem to be suitable to extend credit to. However, once verification of the credit application form has been completed it is quickly determined that extending credit is not a very good idea. The following are some of the issues we regularly come across when we check credit application forms for clients.
By far, one of the most common issues uncovered, when a check of a credit application form is undertaken, is that the home is not owned by the person claiming to own it. It is important to know if a director of the company, who has applied to be extended credit by your business, owns his own home. This is because, for most people, the family home is their main asset and if they have signed a Guarantee then it will most likely be worthless if they do not own their own home. This is because there is unlikely to any other significant assets you can pursue to seek redress for the amount owed to you.
Quite often a director will sign a credit application form stating that he owns his own home. However when a Land Titles Search is undertaken this is found not to be correct. In fact, it is estimated that at least 25% of people claim to own a home on a credit application form but do not. Sometimes the home is owned by a spouse, partner or even parent. Other times, the home is owned by someone completely different and the director is merely renting.
It is also important to find out if the company that is seeking credit from you has any charges over its assets. This is important for several reasons – the main one being that if there is a charge over the assets of the company, the Chargee ranks ahead of you in claiming the assets of the company. This may mean there are no assets left over to pay the amount owing to you.
Another reason to check if there is a charge over assets is that the company may be under financial stress. An ASIC check will be able to verify the number, and the dates entered of any charges against the assets of the company. Again, if a customer has stated that there is no charge over the assets of the company, but in fact there are, then more lies are being made.
One fact that is often not looked into is the ownership of the company. Often the company seeking credit is owned by individuals. However, at other times it is owned by another company. This may not initially seem significant but in fact it can be.
Although there is nothing illegal about a company being owned by another company it should still be investigated further as it may undercover deceptive behaviour. A parent company could be used to own the assets of the company that you are doing business with. This means if the business you are dealing with does not pay what it owes you, then you may have little hope of ever getting paid. This is because you are not doing business with the parent company – which means you cannot seek payment from them unless you have been able to get a signed guarantee from them.
There is a lot written about ‘Phoenix Companies’ and it is another thing you need to be on the lookout for. In simple terms it is someone who sets up and then winds up a company – without paying the debts owed. It can not only leave you without payment but also the employees of the company in question.
Again, an ASIC check can try to undercover this very deceptive behaviour – by finding out if the directors have been directors of other companies (especially in a similar industry).
The above are all situations we have uncovered in the course of checking credit application forms and guarantee statements. All too often it is thought that simply getting these forms signed is enough. Unfortunately, it is far from enough and additional work should be undertaken to verify the information contained in them. Only then can you make an informed decision about whether to extend credit to a customer.
Personal Guarantees – make sure they are verified
We were recently approached by a client to assist with the recovery of an outstanding debt of approximately $20,000 that the debtor was unable or unwilling to work towards resolving. A detailed credit application form and personal guarantee was signed by the sole director a few years earlier.
On review of the forms completed by the directors it was noted that he stated that he owned his own home. This initially led us to think that we would be able to recover the amount owing. However, when we did an ASIC Property Title Search to confirm ownership after proceeding through to the Magistrates’ Court, it was discovered that the house was not owned by the director but his wife solely.
Luckily, in this case we managed to uncover other assets owned by the sole director. We had information about the sole director’s middle name and this helped in our ASIC Property Title name search – which led us to finding out about a property owned by the director. If we had not had his middle name we would have found it much more difficult and costly in identifying his ownership. Armed with this information, we were able to recover the full amount, plus interest and legal costs.
At a cost of $66.00, an ASIC Property Title search is money well spent to confirm whether a director owns the title to their own home. We find a large number of directors simply tick the ‘ownership’ square, either not thinking about the title being in someone else’s name (eg their spouse’s name) or are deliberately being deceptive.
The client now performs ASIC checks on every new credit application. Each application has both a Company search and Land Title search done to confirm that the guarantor has the legal title to the residential property listed.
For further information on how Brodie Credit Control Solutions can assist in helping you avoid bad debts in the first place, please phone 1300 276 343.