Lying down in front of cars and bringing grandmothers into offices to demand payment are just some of the creative debt-retrieval methods that have been used in China in the past. Such extremes may not be necessary – but businesses do need to take action when customers don’t pay up.
The reality is that companies are almost guaranteed to encounter missed payments at some point. As such, a few proactive planning measures could make a big difference in your company’s future financial standing.
Enterprise China spoke with Mack Liu, a partner at the CLN Law Group, and Dixon Wong, Greater China general manager for Milliken & Craig, a debt collection specialist, to discuss the best ways to collect the money that’s yours.
An important first line of defense against bad debtors is to have a formal system in place. On sales invoices and other relevant documentation, clearly outline your exact policy regarding missed payments.
Establish the steps that your company will take in the event of non-payment – and inform customers about them. For example, tell clients that after 30 days, the company will call to inquire why the payment has not been received. After 60 days, a follow-up call and formal letter will be sent to issue the debtor with a specified date that fees must be received, before formal action is taken.
If you are a more established business, set more favorable terms. “Depending on how strong you are, if you are unsure about a customer, you can certainly ask them to pay upfront,” Liu said.
Take into account any potential black periods and the effect they may have on customers’ ability to pay. Many businesses in China, for example, expect that outstanding debts will be settled in the lead up to the Lunar New Year. But if payments don’t come in, creditors – especially those who have been struggling financially – could run into trouble.
Don’t just rely on strategy, though. Be smart about who you do business with. Research potential customers as thoroughly as possible, Wong said, and find out what market players are saying about them.
But what if the bad debt already exists? Or a debtor still defaults despite having a sound system in place?
First, accept the unavoidable: Unpaid debts are an inevitable part of most business practices. “Statistically speaking, if a company’s annual sales are US$1 million, it can expect bad debts of around 5-10%,” Liu said.
Most crucially, you need to address the situation right off the block. The longer a debt persists, the less likely the creditor will ever receive his money. “Maintain continued contact with the debtor,” said Liu. “Call them regularly, and make sure you take notes of every conversation you had and who you spoke to.”
It can become infuriating when a debtor is refusing to pay, but making things personal won’t help the situation. Instead, keep a logical head, and ask them to name a settlement date. Bear in mind that debtors may be struggling to pay other creditors as well.
You are much more likely to receive what’s owed if you offer a debtor flexibility in payment. One approach is to explain that you are willing to accept a proportion of the debt now, as long as the remainder is received by a specified date.
If peaceful negotiations fail, it’s advisable to call in a third party. Most small- and medium-enterprises in China usually try to collect debts without the use of a mediator – but this can be unnecessarily time consuming. “Business owners should spend their time generating ongoing new business, rather than looking back,” Wong said.
Debt collection specialists, for example, can help with the dirty work. While agencies determine if there’s hope for debt recovery from a particular customer, they also communicate to debtors the repercussions of non-payment. This can go a long way: Just the mention of a debt collector’s involvement is often enough to push the debtor to pay up.
At the same time, the number of debt collectors in China is limited, compared to Western countries. While tactics such as violence, intimidation, and other forms of scandalous corruption were prevalent in Chinese debt collection agencies in the past, since 1995 only authorized bodies (mostly Chinese law firms) have been permitted to collect debts. As such, businesses should check the credibility of any mediator they retain.
Call in support
Legal action should only be used as a last resort. Even if you win a court case, there is a high chance that the retrieved funds, minus the cost of legal fees, could result in a loss.
“A lawsuit consumes a lot of time, money and energy. And there are always uncertain elements in a lawsuit which could adversely affect the final judgment,” Liu said.
The number of legal gray areas in China makes going to court even more difficult. Make sure to prepare substantial evidence. This is where recording all correspondence with a debtor can prove vital.
Finally, never underestimate the power of social and political pressures in China. Via local knowledge and connections, creditors can often enforce debtors to pay up, without having to pursue more formal action.
Whatever you do, resist the temptation of simply writing off debts. “Your bad debt is just the other side’s extra profit,” Liu said.