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Category: Debt

  • Smart Debt Management Solutions You Can Be Sure Of

    Smart Debt Management Solutions You Can Be Sure Of

    No one is exempt from experiencing financial difficulties. Poor preparation, as well as a catastrophic setback such as divorce, sickness, or unemployment, may completely upend a person’s life.

    Do you need assistance? Here are some pointers on how to cope with your financial difficulties.

    Determine the nature of the issue

    The fact that you have debt does not always imply that you are in financial difficulty. If this were not the case, few individuals would be able to purchase a home or a vehicle. There are, however, certain red signs that should be regarded carefully and should be investigated further. This is essential for the process of Debt management.

    Do any of the following statements ring true for you? Do you recognize yourself in any of them?

    • You have more than one credit card, and you use one of them to pay off another from time to time.
    • You need a refinancing of your property in order to maintain your current lifestyle or to pay off consumer debt.
    • More than the minimum payment on your credit cards is not possible for you.
    • You choose to postpone or skip certain payments.
    • To repay your obligations, you spend at least 40% of your total income each month.
    • Your financial status is a source of anxiety for you.
    • If this is the case, there are actions you may do to rectify the problem.

    Create a financial plan

    The first step in resolving your financial difficulties is to create a budget. You may use software, an online budget tool, a smartphone app, or nothing more than a piece of paper, a pencil, and a calculator to create your budget.

    You must keep detailed records of all of your income and spending. Keep all of your bills for a month in order to prevent underestimating them. Consider one-time costs such as back-to-school expenses, presents, vacations, obtaining a driver’s license, and so on. Don’t forget to pay off your debts as soon as possible.A number of consumer advocacy organizations also provide budgeting education.

    Cut down on your costs

    Some expenditures may be significantly cut with relative ease. Consider checking your numerous bundles, such as your telephone services, to see if there are any improvements. You might save money by ensuring that they suit your requirements exactly, and nothing more or less. You may also start keeping an eye out for sales at the grocery store and restrict your food expenditures by packing your own lunches.Examine each of your costs to see if there are any ways to minimise or eliminate them.

     

    Make a cash payment

    Although debit and credit cards are handy, they might make it more difficult for certain people to keep track of their spending. Paying using cash might help you remain on track with your financial goals. You may separate your money into multiple envelopes for different purposes, such as food, hobbies, and apparel.

    Put an end to the debt

    Keeping your spending within your means and making sure you have the money to pay off your credit card amount, for example, are two pieces of advice that may help you avoid going into debt. If you’re the sort who makes impulsive purchases that you’ll later come to regret, leaving your credit card at home could be the best option for you.

    Avoid purchasing items that are brand new

    There are a variety of alternatives to purchasing new goods.Purchase previously owned or traded-in items. Look through secondhand shops, classifieds websites, and local bazaar Facebook groups for bargains on clothing and accessories. There are a plethora of transactions and trade options.

    Take out a loan or rent a place. This is particularly interesting if this is a piece of equipment that you will only sometimes use. For example, you may register at the library to borrow books and periodicals.

    Make it happen yourself. Using a coffee maker instead of purchasing a cup of coffee every day saves a lot of money in the long term.

    Take advantage of any freebies that are available. For example, during festivals, there are a variety of free entertainment and activities to enjoy.

    Schedule a meeting with your adviser

    Your financial counselor will assist you in resolving your financial difficulties. His expertise will be particularly valuable in reviewing with you your flat rate bank charges as well as your insurance coverage. They may also give you specific alternatives, such as a credit card with a lower interest rate in exchange for an annual fee.

    You and your partner may also want to discuss the possibilities of debt consolidation. Putting all of your obligations into a single loan with a cheaper interest rate can enable you to pay them off more quickly. It will also make it easy for you to keep track of your financial situation.

    Increasing your earnings

    Consider measures to boost your income in order to pull yourself out of your financial binds. Some options are as follows:

    • Inquire with your boss about working overtime.
    • Offer your goods and services in order to make more revenue.
    • Items that you no longer need may be sold.
    • Look for a roommate.
    • Look for a second job.

    Keep an eye out for advertisements that promise quick money, though. These are often deceptive practices.

    Be realistic in your expectations

    If you’ve been binge drinking for many years, you shouldn’t expect to be able to pay off your debt in a matter of weeks or months. You will be more motivated and your financial stress will be reduced if you set realistic objectives.

    Similar to a diet, reducing your spending too much can cause your hunger to get larger. Allow yourself a little wiggle room in your spending plan so that you may treat yourself.

    Improve the status of your credit report

    You may be suffering from a poor credit history. The interest rates on the loan options you will get will be higher. Why? The financial institution is concerned about you since you pose a larger risk. Here are some suggestions to help you boost your credit score.

    • Make sure you pay your payments on schedule.
    • Maintain a healthy buffer between your current debt and your credit card limit on your credit card.
    • Avoid submitting a large number of credit requests.
    • Maintain your positive practices.

    Conclusion

    Following the resolution of your financial difficulties, you should continue to manage your own money. You will be able to construct an emergency fund using the money you have saved. In an ideal world, this would equal three months’ worth of expenses. Instead of falling into debt if anything goes wrong, you may simply withdraw the money out of the account.

  • The steps necessary to get your debt relief

    The steps necessary to get your debt relief

    There is a set of obligatory steps that every over-indebted person can follow to get ahead and find relief. They are simple. The real challenge is to go ahead with each one and finish the cycle having detected the problem and with the true intention of implementing the solution.

    It must be recognized that getting out of a debt is a more difficult and slow process than getting into debt. It is a long way although it is possible to carry out as long as the debtor is willing to do it.

    Debt inventory
    Consolidating all debts first in chronological order in a single listing offers clarity on the true scope of the problem. The idea is to account for everything from credit to debt in the light account. It is necessary to know the time remaining for each debt, the dates of payment, and the cancellation method agreed (fees, half and half, block, etc.)

    Income inventory
    It consists of recognizing all the income that the person has. From the salary to the money saved in term deposits or mutual funds, anything goes, even the tax return made by the Internal Revenue Service (SII) every year.

    Know the true liquidity
    Consider both inventories.  It’s time to really know how much money the person has to pay debts.

    From the income inventory, you have to discard all the money used to pay for the expenses: basic services accounts, telephony, lease or dividend, gasoline from the car, cable TV, to Netflix. These expenses include the payment of the auto insurance as well as other insurance and legal obligations.

    Recognize the savings
    With this inventory, you have to separate the money that is being used for savings or hosted in financial savings products (term deposit, mutual fund etc.). With this liquidity cleanup, the person will have a true insight of their debts and the money available to pay them.

    Nobody likes what they see after doing this exercise. Most of the time it leaves in evidence much more than the debts:

    Bad financial organization
    Low income
    Low savings capacity
    Consumption addiction
    Fraud or embezzlement
    The first thing to avoid is to panic. The debts are repairable as long as the person is willing to follow the following steps:

    Ask for help

    By the time the debtor realizes he has no money to pay, few alternatives are available. That is why every debtor must have a direct line with their creditors.

    The first thing that the over-indebted person must do is approach their creditor and consult what their new payment alternatives might be. It is better to get ahead of the collection agency and negotiate with the creditors a new payment date and renegotiate the credit amounts as best you can.

    This step includes separating the waters between the debts; evaluate the possibility of paying the smallest and renegotiate the times of the largest.

    Since he gave the notice too late, the debtor should keep in mind that the creditor will offer more time but at a new higher interest rate. Another positive result is that if the debtor manages to pay the debt within the new stipulated time, his financial history will not be so damaged.

    Compromise well

    If the creditors agreed to reorganize the debt with new payment dates, amounts and fees, the debtor must start this new stage on the right foot.

    This includes taking care of the work until you get out of the financial mess, or looking for a job that offers higher income to have more slack to meet the payments.
    This does not mean passing on opportunities, but the debtor must study well the returns that these offer; focus efforts on those that will give you money within the new payment terms.
    In the case of independent workers, this also includes organizing and prioritizing jobs according to amounts; such income will help to pay such credit while the other parallel project will allow the payment of another debt.
    Clean the closet

    The debtor already made the inventory of debts and income, asked for help and began to pay little by little. Now the real “cleaning” of all those unnecessary expenses begins.

    This includes making some sacrifices, including:

    Cancel the cable account
    Change the cell phone plan or simply opt for prepaid cards
    Stop going out to eat out
    Reduce supermarket expenses to the essential or buy in a supermarket with wholesale prices and share expenses with a relative or friendship
    Occupy more public transport (which will lead to greater organization of the times), or well organize the use of the car

    In this step, the debtor must also evaluate the possibility of selling assets or high-value assets to redirect the money to the payment of the debts.

    If the creditors refuses more time

    If the debtor follows all the steps but still cannot pay there is one more step, and that is to take part in the Bankruptcy Law for Natural Persons. Ordinary people can exercise this right to declare insolvency and request legal mediation to renegotiate delinquent debts. It is a free and voluntary administrative procedure that facilitates the Superintendence of Insolvency and Re-entrepreneurship (SUPERIR).

    Every debtor must know this information before accepting bankruptcy:

    The official name of the procedure is the Bankruptcy Procedure of Renegotiation.
    Its objective is to renegotiate the obligations of the debtor or facilitate the liquidation of assets for the payment of its current obligations.

    It consists of three hearings in which the debtor, its creditors and the Superintendency participate.
    The debtor must not have issued service provision tickets during the 24 months prior to the request for renegotiation.

    You must have two or more debts due for more than 90 calendar days, that are in force and that exceed the 80 Development Units (among other requirements).
    It must have the Unique Code granted by the Civil Registry and Identification Service. This is requested at the service offices.

  • Debt Consolidation: everything you want to know

    Debt Consolidation: everything you want to know

    If you are looking for debt relief, whether for student loans or credit card debt, you have probably heard of debt consolidation. But unless you have already faced challenges with debt, this may be the first time you encounter this concept. If so, this page is designed to teach you everything you need to know about debt consolidation.
    Body:Debt consolidation is a financial process in which you take several debts and combine them into a single monthly payment. In most cases, you can only consolidate debts of the same type. So, the consolidation of student loans is done separately from the consolidation of credit cards, in case you have both types of debt to eliminate.
    The consolidation objectives may vary depending on the type of debt and its financial situation. However, in general, it is consolidated to:
    • Simplify your bill payment program
    • Reduce your total monthly payments
    • Minimize or eliminate interests

    Things you need to know about debt consolidation
    • Do it on your own: It usually only works with simple and low debt volumes. Whether you’re talking about credit cards, student loans or tax debt, this advice is right. Consolidation “made by yourself” is usually the most effective when you have a low volume of debt. If you owe more than $ 50,000 from any type of debt, it is usually best to get professional help. This is also true if your situation is “complicated”.

    • Recognize that consolidation and liquidation are different solutions: People often confuse consolidation with debt settlement, but the two are very different. With debt settlement, the goal is to eliminate your debt for less than the total amount owed. On the contrary, the objective of consolidation is to pay everything you owe.
    Consolidation simply facilitates debt management within your budget. You restructure the way you pay the debt, so you can make the payments each month without having to fight. Although you can reduce interest charges, the principal or principal is always paid in full.

    • When done correctly, consolidation should not damage your credit: This is another way in which consolidation and settlement differ. The settlement of your debts for less than you owe, creates a negative observation in your Credit Report. This lasts seven years from the date of the discharge of the balance owed.

    On the other hand, debt consolidation should not negatively affect your credit if you execute your plan correctly. In fact, in most cases, consolidation improves your credit score. Create positive credit history every time you make a payment on time. It also reduces your total debt burden, which also helps you achieve a higher credit score.Normally, the only time you consolidate the debt, you can damage your credit, is when you stop making a payment or leave the consolidation program.

    • Re-consolidation is normally allowed: Generally, if you consolidate the debt and your plan does not work, you can usually re-consolidate with another solution. For example, let’s say you use a personal debt consolidation to consolidate a credit card debt. Then, as you pay off the loan, you accumulate new balances on your credit cards. Then he starts having difficulties to make the payments again. You can re-consolidate, using a broader debt consolidation loan, or enroll in a debt management program. In both cases, the original consolidation loan can be included in your new plan.

    • Consolidation is not always guaranteed to reduce your payments:Two of the federal payment plans that you can use to consolidate federal student loans can actually increase your payments. The standard refund is designed to pay off all your loans in 10 years or less. This allows you to get out of debt quickly, but the compensation is that you can have higher monthly payments. With repayments or graduated depreciation, payments start low, but then increase by 7% every two years. As a result, the final payments you make may be even higher than the standard plan.
    Even with credit card consolidation, lower payments are not guaranteed. Since this type of consolidation works to reduce or eliminate interest charges, it usually decreases your monthly payments, too. However, depending on the amount of debt you have and the length of the payment schedule, payments may be higher.
    Conclusion: If you have very good credit, should you consider options for debt consolidation, such as “do it yourself”, so you can avoid damaging your credit.

    If you simply cannot afford to pay all you owe, then you should explore options such as debt settlement. This is where you can settle your debts for less than the total amount owed. However, it is important that you know and be forewarned, because this could damage your credit significantly in the years to come.
    If you cannot find any option that works for you, bankruptcy is the final solution you can use to get a fresh start.

  • All you need to know about debt consolidation

    All you need to know about debt consolidation

    A debt consolidation is a way to refinance a debt. A person can take out a new loan or line of credit that is large enough to pay off their loans. The outstanding debts are then repaid and you begin to repay the new loan or line of credit, which usually have a lower rate or a simpler payment schedule. Paying off your debts is a great way to get your finances back and rebuild your credit.

    A debt consolidation loan is like a standard personal loan, but the money is used to pay off the debts. Since all debts are repaid, they are consolidated or “consolidated” into a new loan.

    A debt consolidation loan can be used to pay off credit card debts, pay late bills, auto loans and more. When you repay your debts through a consolidation loan, you only need to repay the new loan. Your payment schedule is thus simpler and the interest charges are lower, especially if you had late payments for your old debts.

    How to apply for debt consolidation?

    The bank assesses the risk you represent. They study your credit history, debt ratio, repayment behavior and ability to pay your loans. If the bank feels that you would have had trouble repaying the other creditors, it may not give you the loan.

    Banks may require a guarantee through an endorser. If you have a good job and equity on your home, for example, you could be a good candidate, depending on the amount of debt to consolidate.

    How does a debt consolidation work?

    1. Ask for an online loan quote to find out how much money you can borrow. It will only take a few minutes and it will not affect your credit score.
    2. If the bid is right for you, a specialist from the respective financial organization will contact you. He will recommend a loan solution and a payment plan tailored to your needs and your budget.
    3. Visit the respective branch to complete the loan application process and get your debt consolidation loan.

    Why do people ask for a debt consolidation loan?

    People are asking for a consolidation loan for several reasons:

    • A debt consolidation loan consolidates bills and debts to make a single payment. It is therefore easier to manage the repayment of debts.
    • A simplified payment schedule allows you to repay your debts faster and, therefore, save on interest charges
    • An easy-to-manage payment schedule will allow you to make timely payments, demonstrating good repayment habits on your part.
    • Over time, a positive payment history will help you rebuild your credit.

    What is the best way to consolidate your debts?

    The best way to consolidate your debts depends on your goals. If you like to have a simplified payment schedule, then choose the monthly payments, since they involve only one payment per month and therefore only one date to remember. If you like to repay your debts faster choose installments every two weeks and a shorter loan term.

    The goal of a debt consolidation is to free you from your debts. It is therefore important to keep control of your new loan. Regardless of your payment schedule or the length of your loan, consider setting up automatic payments. The money will be withdrawn from your account on the day of your choice. With automatic payments, you no longer have to worry about forgotten or late payments. So you stay on track and repay your consolidation loan on time.

    Why debt consolidation loans are recommendable?

    If you have multiple bills and unpaid debts, debt consolidation may be the right solution for you. Debt consolidation is especially useful if it is difficult for you to track your payments. If you are thinking of getting a debt consolidation loan, try any debt consolidation calculator from any financial organization offering debt consolidation. The calculator lets you see how much you can save by paying and consolidating your bills with one payment.

    Advantages

    The main advantage is certainly the reduction of stress related to multiple payments and especially to their deadlines. Also, the interest rate for a debt consolidation is usually lower than that to pay to your creditors and these will be paid in full, more quickly. It is obviously easier to manage only one payment, your chances of forgetting decrease considerably.

    The inconveniences

    Even if the consolidation of your debts allows you to save on interest payable, you must keep in mind that your overall debt still exists. Ignoring this detail, the possibility of getting into debt is watching you. It will therefore resist the appeal of an “empty” credit card, as attractive as it is.

    Conclusion: By consolidating, the overall debt remains the same, contrary to the consumer proposal. And even after consolidating credit card balances, remember that the amount of debt to be repaid will increase if you continue to use them.It’s never too early or too late to take control of your finances. Give yourself some time to review your financial habits and make sure you are on the right track in achieving your goals. If in doubt, your financial adviser can help you.

     

  • 7 Strategies to Reduce Credit Card Debt

    7 Strategies to Reduce Credit Card Debt

    We are a society of consumers.  The average American household is over $100,000 in debt. Gradually, the mentality has changed from ‘saving towards’ to ‘paying off’, allowing creditors to take advantage of individuals with eyes bigger than their wallets. We eat nice dinners, take luxurious trips, and add to our wardrobes.  But at what cost? I want to tell you the story of a man digging out of credit card debt.

    This is my story.  In less than five years, I have paid off $20,000 in principal debt to credit card companies and creditors.  My balance sheet still isn’t clear, but I am confident my experience will benefit other debtors. The nuances of credit and debt are complicated, but the basics can be digested in a matter of minutes.  Take the time to wrap your head around these seven strategies to reduce credit card debt.

    #1 Make a Debt Reduction Plan

    If you’re serious about freeing yourself from credit card debt, paying down debt has to be the priority.

    Calculate Your Timeline

    Unlike a loan, credit card debt doesn’t have a repayment timeline built in.  It is essential that you set one for yourself. Set your own minimum monthly payment (higher than the required one) and use a debt repayment calculator to project when you will be free of credit card debt. [Alternately, you can enter your $0 balance deadline and have the calculator show you how much to pay off every month.]

    Earmark Money from Each Paycheck

    It is a mistake to pay off your credit card after you have handled other expenses.  Once you have decided how much to pay each month, make your credit card payment an automatic deduction from your checking account.  You’ll be forced to budget around your debt-reduction priority.

    #2 Pay Off Debt Before You Save or Invest

    Financial strategy is ultimately up to you, but I advise against continuing serious savings/investment while you are trying to pay down your credit card debt.  It’s all about the math. If you’re earning 4% interest on $20,000 investments while simultaneously paying 12% interest on $20,000 debt, you’re losing money. Unless your investment has a specific purpose that requires immediate action, I suggest focusing your financial attention on paying off credit card debt.

    #3 Identify High Interest Balances (And Attack Them)

    In order to minimize interest payments (and ultimately how long you’re in debt), concentrate on paying off debtors that are charging you the most interest.

    Pay More Than Your Required Minimum

    Credit card monthly payment minimums are set slightly higher than the amount of interest charged that month, so paying them addresses very little of your principal debt (the balance you eventually need to decrease to 0). Increasing your monthly payment above the required minimum begins to drastically cut your total amount of interest paid.

    Focus on Credit Cards with High Interest Rates

    While it may be tempting to pay off credit cards with higher balances, you should focus on the ones with higher rates.  Assuming you’re going to make the same payment amount, hacking away at the principle that is charging a higher percentage will save you money.

    #4 Investigate any Penalty Interest Rates

    Like their credit report, most people don’t take the time to read their entire credit card statement.  You should.

    When you do, you may see various interest rates being charged to different portions of your balance (some much higher than others).  Often this is a result of penalties (from payments dates), overdrafts, or cash advances.  These penalty interest rates can be up to three times your normal purchase rate.

    It is critical to reduce this high-interest debt by paying more than your monthly minimum.  

    You will simultaneously reduce the amount of debt accruing interest and the aggregate (whole) interest rate you are being charged.

    #5 Consolidate Your Debt

    Debt consolidation can be a real ‘out-of-the-frying-pan’ proposition.  Read carefully to avoid getting in more financial heat than you were in before.

    Beware Credit Consolidation Offers

    If you’re in debt like me, you get a lot of mail from agencies who claim to be able to consolidate your debt and reduce your monthly payments.  Avoid these.  While they are probably not illegal and not necessarily a scam, they often come with hidden clauses than may affect what you owe (and your credit score) in ways that are not initially apparent.  Trusted financial institutions are more reputable sources of information regarding debt consolidation.

    Consider 0% APR Credit Cards

    Some credit cards entice borrowers with offers of 0% APR (interest) for an initial period of time.  This allows you a break from high interest to reduce the principal of your debt. Make sure to read the fine print regarding any balance transfer fees and the interest rate after the duration of the 0% promotion. Be aware that credit cards may decline you, even if they have previously sent you correspondence containing language like ‘You Are Approved’. Do your diligence and read up on some of the best credit cards from Chase and other reputable lenders.

    Credit Cards with Rewards

    Many credit cards also offer members rewards like travel benefits and cash back.  Since you’re focused on debt reduction, I don’t recommend lavish personal spending.  However, if you make reimbursable charges for work, certain personal credit cards can generate benefits that will help you save money and pay down balances.

    #6 Monitor Your Credit

    The G.I. Joe cartoons that I grew up watching taught me that ‘Knowing is Half the Battle’.  I can attest to the fact that knowledge (in this case self-knowledge) is your most powerful tool for financial salvation.

    Study up on Your Credit Report

    Your credit report is way more than your score.  Your credit report has a lot of substance to inform your journey out of credit card debt.

    While debt usually has a negative affect on your credit score, debt and credit do not necessarily have an inverse relationship. I had a lot of credit card debt but a pretty decent credit score because I was making my monthly minimum payments.  Your credit score is a measure of ‘how you handle debt’. Put another way ‘are you a good borrower’?

    One of the biggest credit score factors is the percent of your total revolving (e.g. credit card) credit you are currently utilizing.  For example, someone with $20,000 total credit and a $5,000 balance (25% utilization) looks much better to potential lenders than someone with $10,000 total credit and a $5,000 balance (50% utilization).  For more info on credit scores and reporting, read up on some bonafide financial journals.

    Don’t Pay for Credit Monitoring

    There are plenty of great free credit monitoring services.  Don’t use a site that charges you a monthly fee.

    #7 Don’t Backslide  

    Don’t Confuse Credit with Money

    It is a big mistake to think of a credit card with a $10,000 limit the same way you’d think of $10,000 in your checking account.  Don’t get excited about freeing up credit and then spend it. Keep on track.

    Downshift Your Lifestyle

    It’s time to pay the proverbial Piper.  If you’re like me, you indulged in some luxuries above your pay grade when you were racking up that credit card debt.  While you’re focused on reducing your debt, you won’t be able to spend the same. Fear not, there are plenty of free and cheap distractions to keep you busy between scrupulous analyzing your credit reports and credit card statements.

    The Take-Away: Avoid Credit Card Debt

    In my experience money might not be able to make you happy, but debt sure can make you miserable. Since paying off over half of my credit card debt, I feel better.  I’m confident about the financial future of my family and generally more optimistic.

    I’m not saying don’t use credit cards.  Credit cards can be a fantastic tool for making specific purchases as long as those purchases are within your budget to pay off.  Keep in mind that a balance on your credit card only accrues interest if you fail to pay the card off entirely every month.

    Take some advice from a Prodigal Son and stay out of credit card debt.  If you do find yourself there, do your homework and start chipping away at the balance.  Debt reduction can be a lot of work, but it’s always attainable with the right attitude and coaching.

    A firm believer that freedom of information improves business, travel and life, freelance writer Ben Lovell is committed to sharing best practices.  Read more of his articles at the Gothic Optimist.

  • Importance of credit management during economic growth

    Importance of credit management during economic growth

    Why overdue debtor levels increase during times of economic growth, and 3 steps management can take to avoid the negative consequences.

    It’s a little known credit management fact that outstanding debtor levels increase during times of economic growth!

    But 3 credit and debt collection practices can keep cash-flow strong and reduce business risks.

    Introduction

    Managing working capital is vital in both periods of economic growth, and many countries such as Australia are forecast to enter a period of economic growth.

    Cash flow stresses on businesses are caused by management getting distracted away from credit management during, and immediately following, periods of change in economic growth.

    Outstanding debtor levels increase in both situations of economic slow-down and economic growth, and the negative effects are many – working capital comes under significant pressure, bad debts increase, paying your own bills becomes difficult, business risks increase.

    Businesses should review their credit policies and increasing management focus on collections early in a shift to economic growth to prevent an impending increase in outstanding debtors.

    Debtors increase during slow-downs, and during growth

    The importance of tight management of cash flow and outstanding debtors during economic slow-down is widely known. Debtor payments slow down and bad debts grow during periods of decline in economic growth, as debtors’ businesses suffer from falling sales and cash flow difficulties.

    Less well known is the fact that overdue debtor issues are also significant during economic growth. In both cases management tends to respond behind the curve, when the problem has already developed:

    • As economic slow-downs start to hit, typically management’s first response is to tackle the immediate and obvious symptoms of the slow-down, such as falling demand and falling sales.
    By the time management turns to chasing outstanding debts, the debtors are struggling with their own problems caused by the slow-down, and collecting the much needed cash is difficult and can be expensive.

    • During periods of increase in GDP growth, typically attention also diverts away from credit management, to the immediate and attractive pressures of increasing sales and the requirement for increased production and delivery.

    By the time attention turns to collecting outstanding debts, management finds that credit has been extended to debtors who are not creditworthy, and too much credit has been extended to other debtors, so collecting the much needed cash to fund growth is a slow and laborious drag.

    Practical steps to take in advance

    The good news is, there are practical steps management can take in advance, to protect their working capital and margins, for periods of growth and slow-down. Here are 3 steps to keep the cash rolling in and avoid unhappy business risks:

    1. Review credit policies
    • Set value and timing limits on all customers’ credit. E.g. no more than $20,000 credit, and no more than 30 days overdue.
    • Are credit checks made on all new customers?
    o Check each new customer and set credit limits accordingly
    o Catch slow payers early – make a diary note to review the payment pattern of each new client 90 days after their first purchase – ask slow payers to pay up to date and stay current – restrict further credit until paid up to date.
    • Regularly refresh credit checks on existing customers who pay late, and review their credit limits according to credit check results.

    2. Increase collection speed and effectiveness
    • Follow-up all outstanding accounts quickly to help Debtors to learn that they might be able to pay other creditors late, but they must pay you promptly.
    o Treat terms of trade as a fixed requirement, not a flexible guideline
    o Follow-up non-payment immediately its overdue
    o Apply a short-cycle follow-up regime, e.g. at 14 days a reminder, 7 days later a Final Notice, 7 days later a legal Letter of Demand.
    • With persistent late payers:
    o Send a reminder letter one week before the account is due for payment, reminding the debtor that payment is due in a week.
    o Send an overdue notice, email, or phone call, 2 days after debt is due for payment.
    o Send a Final Notice, 14 days after payment is due.
    • Act quickly to get priority payment:
    o Debtors priorities their payments according to which creditor chases them most firmly.
    o They usually pay Debt Collection Agencies before other creditors.
    o Get priority payment of your debts by engaging a Debt Collection Agency early, to get your troublesome debts paid first.
    • Switch to a Debt Collection firm that:
    o Offers free advice to resolve tricky debtor situations.
    o Provides Final Notice letters on their letterhead, which you can send directly to debtors, for zero debt collection commission on payments.
    o Has no fee-per-letter for sending demand letters on their solicitor’s letterhead.
    o Charges a flat-fee commission, around 10%.

    3. Make credit review a regular priority focus
    o Businesses benefit from making credit review part of their regular operating rhythm.
    o Monthly review is too low frequency – daily or weekly management focus on outstanding debtors is best practice.

    Summary

    Australia is forecast to be entering a period of economic growth. During economic growth, credit policy and collection disciplines tend to loosen, which results in excessive working capital being tied up in outstanding debtors.

    Loose credit policy and collection disciplines cause cash flow pressures that constrain funding for growth, cause increased bad debts and introduce more significant business risks.

    There are actions management can take to prevent an increase in outstanding debts and to collect outstanding debts more quickly and effectively.

    Management should consider taking those actions now, in advance of the growth forecast.