With the crisis, late payments have become one of the biggest headaches for businesses. Pere Brachfield (www.perebrachfield.com) has been studying this problem and teaching people how to handle defaulters for over 20 years, working with different universities and business schools. He is also the director of the Centre for Default Studies and has written more books on this topic than anyone else in the world. Mr Brachfield gave a course on bad debtors at the Mercabarna Training Area in November.
Do you have more work now with the crisis?
We are always busy giving courses, writing reports, doing research and so on, but it is true that with the crisis the media and the public at large are more interested in what we do, because defaults and arrears are a problem that more businesses are facing.
Is defaulting the biggest problem businesses face today?
It’s certainly one of them, together with lack of liquidity and lower turnover. However, defaulting does not impact a large company in the same way that it does an SME. Generally speaking, SMEs have a weaker financial structure and so are more vulnerable in the face of slow payments.
You classify defaulters into three types...
Yes, the first is the one who can pay but doesn’t want to, known as the ‘intentional defaulter’. The second is the one who wants to pay but doesn’t have the money to, i.e., the ‘accidental defaulter’; and the third one is what we call the ‘hakuna matata’, the happy-go-lucky type as the Disney film The Lion King puts it. These people are defaulters by negligence, they run their business any which way and get into debt.
Which of the three is the most dangerous?
The first one, no question about it. The intentional defaulter knows what he is doing and tries to protect himself against any claim action that can be made against him.
Is there anything we can do to try to avoid falling into the hands of a defaulter?
Prevention is crucial. We should avoid selling to customers who are potential bad debtors. How? Today it is very easy to detect a bad-debt company or person. You sign up to a company that specialises in providing financial information and you can get a report on the solvency of a particular customer over the Internet for just 10 euros. By so doing you can turn down working with a customer you know might give you a problem.
It’s as easy as that?
Indeed! And yet 41% of companies in Spain still don’t use any type of solvency criterion to select customers. That is why we insist on prevention.
From what you have been able to tell from the course you gave in Mercabarna, are the businesses here using these mechanisms?
The type of customers that Mercabarna businesses have makes prevention work difficult. Wholesale customers are retailers who generally run their own business and it is hard to find solvency reports in such cases, because they don’t lodge annual accounts or financial statements. Also, a self-employed person has to give their express consent before a report of this type can be made of them, as compared to the case of a company where the information is public.
So if we can’t detect a bad debtor, what can we do if we get our fingers burnt?
It’s essential to have good written documentation of all the operations you perform with the customer and not to base your relationship on trust. I understand that Mercabarna companies have rush hours, a great deal of staff turnover, everyone is in a hurry…but filling out all the paperwork properly , including invoices, delivery notes and so on is very important to legally document cases of non-payment.
But if we already have a customer who isn’t paying...
It’s always a good idea to negotiate, even if it drags the process out more. In these cases, the ideal thing is to get the defaulter to acknowledge that he has a debt. In fact this document could be a very simple piece of paper. It could be, for example, a copy of an invoice, where the non-paying customer mentions assuming the debt and commits to paying it in fractions. If he signs it, it will be legally valid if you end up having to sue him for the money. Debt acknowledgement can also be done via a contractual document that is binding on both parties. The supplier waives a percentage of the debt if the customer pays before a certain date. There are lots of ways to go about it.
The acknowledgement document is key!
Yes, because, if you end up going to court, having this document will allow you to use a special procedure called ‘exchange trial’, which is much faster and settles things better than an ordinary trial.
Getting this document means your defaulter has to acknowledge that he owes you money. But if the customer doesn’t want to play ball, what can you do?
Send him official notice by bureau fax or notarial deed claiming the debt and the late-payment interest it has accrued. It might seem obvious but it is fundamental to have an official claim in writing because, if you don’t, when you go to court the defaulter could allege that he didn’t know anything about it. The judge could then decide that the judicial procedure was unnecessary and rule that you have to bear the legal costs.
What other claim mechanisms are there?
Letters. For example, I have just published a book called “Practical Tools for Non-Payment Management” (published by Profit) where I propose, among other things, up to 40 different models of letters. You wouldn’t use the same tone in a letter for a customer who has forgotten to pay as you would for one who sent you a cheque that bounced, for example. Apart from that, I recommend that wherever possible you visit the non-paying customer in person. This could help you find out more about his real situation and the reasons why he isn’t paying you.
Do many people give up on pursuing their debts?
Yes, it’s what usually happens. But it’s a mistake because that’s what the defaulter is counting on, i.e., that’ll you get sick of it and go away. But if you’re tired of pursuing a debt you can turn to companies that specialise in payment management or legal firms with lawyers that specialise in lodging claims.
Q- Is defaulting becoming more common?
A- Non-payments and slow payments are growing. According to a study by a financial information firm, 60% of Spanish companies did not pay their invoices on time in the latest quarter of this year. Spanish law is very clear on this point: arrears starts the day after the invoice falls due and currently the average delay in paying is 21 days. That’s a lot!