How I could have avoided my first bad debt

I want to tell you about my first (and hopefully only) bad debt.

Cast your mind back to December 2021.

WA’s post-COVID boom was hitting its straps. By 1 December, I was fully booked with work to keep me busy until Christmas.

Then, I received a cold call from someone. Let’s call her "Mrs Dodgy". Mrs Dodgy asked if I could draft an equipment hire contract urgently for her husband, Mr Dodgy’s new business.

Initially, I declined as I was too busy. But, Mrs Dodgy was persistent. Eventually, Mr Dodgy called too, sounding stressed. I caved in and sent a costs agreement to Mrs Dodgy’s email address. Mr Dodgy didn’t have a website for the new business, so he didn’t have his own email address. As requested, I made the costs agreement out to Mr Dodgy.

Mrs Dodgy replied to my email to tell me to go ahead. Neither of them signed the costs agreement. I didn’t take issue with this, as my costs agreement indicates that the client can accept by written instructions, with or without a signature. Being under the pump, I failed to consider the implications of whether Mrs Dodgy was authorised to act on Mr Dodgy’s behalf.

I squeezed the job in and returned the draft to them the week before Christmas. I was pretty happy with myself and hoped they’d be happy too. I wanted to get all my billing tidied away before Christmas, so I sent an invoice straight away.

Guess what happened next?

I sent polite emails in January to seek feedback on the draft and to chase up the bill, which had become overdue.

Did they respond? They did not. Crickets.

I followed up by email again in February. Again, no response.

By March, I was getting annoyed. It wasn’t a huge bill, but I had worked extra hard to get the work done by Christmas.

I tried to call Mr Dodgy. His number appeared to be out of service. Mrs Dodgy wasn’t answering or returning my calls and emails. I tracked her down on Facebook, and she said she’d remind Mr Dodgy. I don’t know if she did, but I never heard from either of them again.

How could this situation have been avoided?

After almost three years in business, it was my first ever bad debt. It’s a rite of passage for most businesses – one that most of us would rather avoid.

So, what are some things that could have been done differently?

1. Taking a deposit and claiming progress payments

Because I’m a lawyer and apparently not to be trusted, there are laws that stop me from taking upfront payments from clients unless I hold the money in a statutory trust account.

I’ve always wanted SoundLegal’s admin to be as simple as possible. For that reason, I don’t operate a trust account. That means I can’t take deposits for the work I do.

That’s not the case for most businesses. If you run a conventional business, consider front-loading the cash flow of every project by taking a deposit. This is particularly important if you have to order materials that can’t be returned to the manufacturer.

I also had the entire payment due in one instalment. If I had split the work into stages and required payment after each step, I would have reduced the overall payment risk.

2. Warm referrals only

One of my standard risk management strategies is to focus on warm referrals. If the new client is referred by someone I trust, there’s a better chance they’ll also be trustworthy.

However, as a business grows, there will be some clients that are unknown quantities. In that case, step 3 applies.

3. Vet the client

As?SoundLegal?has been around for a while, I pick up some clients via Google. I vet them, using public information. Generally, I will only accept instructions from a client that already has an ABN and preferably is an incorporated entity.

This is a lesson I learned the hard way. When Mr Dodgy went AWOL, I Googled him and found his name on a debt collection register. That should have been a huge red flag that he might not pay his bill, which I could have checked in 10 seconds after I took the initial enquiry.

4. Contractual protections

I’m a contract lawyer and am pleased to say that SoundLegal’s costs agreement has robust payment terms. It allows me to assign debts to a collection agency, with a right to recover the collection costs.

I’m usually cautious about ensuring I have an enforceable contract before I commence any work. I work on fixed fees with clearly defined scopes, and I insist the client accept a written costs agreement even for minor matters.

But, I let Mr and Mrs Dodgy slip through the cracks. This brings me to step 5.

5. Get a written contract confirmed by the client or the client’s authorised agent

In my haste to beat the Christmas rush, I didn’t apply my usual commercial hygiene to the Dodgy enquiry. I accepted email instructions from one person on behalf of another, even though it wasn’t clear if she was authorised to give those instructions. Despite that fuzzy contractual setup, I failed to insist on Mr Dodgy signing my costs agreement. All in all, I didn’t have an explicit, unconditional acceptance from Mr Dodgy himself.

Embarrassingly, I, a contract lawyer, may not have had an enforceable contract. I was too ashamed to explain it to a debt collector, so I wrote off the debt as the cost of a lesson learned.

Please learn from my mistakes

Make sure you enter a written contract before you incur any costs. The contract should have clear payment terms, a right to assign debts and a right to recover the costs of collection. Structure your payments to support cash flow, including taking as much payment upfront as you can.

How can SoundLegal help?

That bad debt left a very sour taste in my mouth. I’m extra motivated to help you avoid the same experience.?Get in touch?if it is time to review the contracting process in your business.

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