In the past few weeks, I have learned a few things and seen a few things that others should know! I have learned that in 16 years of providing debt collection and debt prevention systems to my clients in the Bay of Plenty, I have become very good at it and that the value that I can bring to my clients in this area is, by all available evidence, unparalleled.

In saying this, I do not mean to be immodest or arrogant. It is simply a fact. Since Feb 2007 I have met with, on average, three businesses a day for 16 years, each with their struggles, USPs, niches, styles and approaches, meaning that I have listened to 11,745 scenarios from nearly every industry and when I say almost every industry let me give you a snapshot of one day: In the morning I was meeting with an $800 per hour commercial lawyer in a plush CBD office, mid-morning I was in a Kohanga discussing errant accounts, and in the afternoon I was in a dairy shed with a man who manufacturers synthetic cow vaginas for the artificial insemination industry discussing how to create terms of trade to protect his business.

For each industry I work with, I research the transactional nature of the industry, the legislative requirements and the most common points of contention in those industries. If I am to be trusted by these clients to protect them, I ensure that I do just that. The amount of work that I do and have put in to become an expert in my field has given me enormous respect for other professionals that do the same, often as trusted advisors, we are asked to weigh in on various business issues (I was once even asked to be a guest lecturer at a polytech to speak about marketing because they were impressed with my credit management knowledge!)

It is then our opportunity to show professional courtesy to our fellow advisors and say that ultimate line, “Unfortunately, I am not an expert on that issue, but I know just the person who is, and I’m sure they would be happy to discuss that with you”. I have heard so many advisors bluff and blunder through giving advice that they have no place giving simply because they feel that saying “I don’t know” will cause them to lose face. Deferring to a true subject matter expert shows ultimate respect for your client and the expert you refer to, strengthening both relationships!

There is no shame in holding your client’s well-being above your pride! It is the difference between a functionary and a trusted advisor, I know which one I would rather be.

Of all the debt situations I see in my role, one of the more troubling yet increasingly common occurrences is friend and family debts. These seem more prevalent in the trades, but we see them across all industries. This kind of debt has a particular set of challenges that we see time and time again. These are emotional leverage, lack of documentation and lack of adherence to policy. In this article, we look at why these are often not conducive to good business.

With friend and family transactions, the work done is often unquoted as there is a feeling of “they will look after me”, and usually, when the invoice arrives, and it is more than was expected, the trouble begins. Not having a quote, or better yet, a range of quotes means there is no defined value of work. Therefore, how can a “good deal” be ascertained? Being able to accurately assess the value of work done after the fact, especially without market comparisons, is very difficult. Auditors and quantity surveyors train for years to be able to do this, and still, cost overruns and miscalculations often occur with this level of expertise. How can a layperson be competent to know whether their mate “Bob” has looked after them or fleeced them? In cases like this, it often depends on the mood or current state of the relationship. 

No matter how selfless or generous a person is, we all have a ledger in our heads of favours done for and received from friends and family, often the view on the “deal “ received has more to do with the state of this ‘ledger’ rather than the actual value received. When preparing clients for disputes tribunal hearings against friends and family, it is always a struggle to focus on the situation at hand without “well, I gave him this ( water blaster/car part/ trailer), so should we mention that? 

If a quote and terms are received and accepted, all of this is removed from the situation, and it doesn’t have to severely affect or even destroy the relationship. In larger organisations with dedicated accounts or credit management staff, we see accounts for friends and family of the owners or directors sitting outside the standard credit procedure for fear of offending the debtor or their friend and family within the organisation. Depending on their involvement in the credit management procedure, the first time that the director or owner hears of the overdue account it could be 60 or 90 days down the track, making for a more uncomfortable conversation than is necessary as the debtor may not have received any reminders that could have resolved the issue.

So, in summary, if you keep business and friendship separate, you should be able to keep one without it being at the expense of the other.

After 13 years in the credit management and investigations field, I have found that there are certain financial levels that are dependent on the debtor’s relationship with the creditor. I often hear from creditors, ” I’m sure he will pay. He is a mate”, or “I never expected this from her, seeing as we are family” then, when I see the amount, it will generally fall into a familiar range.

I have observed that otherwise seemingly honest debtors will be willing to sacrifice a friendship for no less than $2500 and a familial relationship for no less than $10,000. What makes these deceptions easier and the event more frequent as well as harder to remedy is that the closer the relationship, the less likely the parties are to have a binding written agreement between them, even in cases of one party personally guaranteeing a loan for the other from an institutional lender (usually auto loans), in this case, the lender normally has a rock solid agreement that binds the guarantor to the debt but in cases that there is no agreement between the principal debtor and the guarantor the cost and difficulty of resolving the debt are multiplied.

The lack of documentation also serves another negative purpose, it removes the right to register a legally valid credit default that will impact the debtor’s ability to access lending in the future, which makes friends and family lending more likely, perpetuating the cycle. The only way to enforce these unwritten agreements and be able to default list is to obtain a legal judgement (often at the creditor’s cost), this is all well and good, but if you consider that the debtor has already ignored their obligations to a party that they have an outside relationship with how likely are they to comply with a faceless organisation or a legal administrative office?

What private lenders must remember is that familiarity does not always equal importance in the debtor’s mind, and the closer the relationship often, the more likely the lender is to “write off” the debt in deference to the relationship. Also, there is death to consider, undocumented loans are often the subject of estate litigation, if any readers have been involved in such litigation in their lives, they will know that this often spells the end of any retrievable relationship. In my experience, success in such litigation is significantly compromised if the debtor claims that the “loan” was indeed a “gift” the unwritten intentions of those who have passed away are, in my experience, impossible to prove beyond a doubt.

A somewhat tricky or uncomfortable conversation at the start of a loan will always be easier to handle while both parties are on good terms and the debtor is more interested in getting the funds than being offended by a piece of paper. And as I always say, if they won’t sign, they won’t pay.

These immortal words contained within Kenny Roger’s 1978 hit song ‘The Gambler’ may not have been written about business, but the words certainly have relevance to the business landscape at this time. Our national attitude of perseverance and determination is a real source of pride for us as kiwis, but when pushed too far, this attitude can be dangerous and sometimes fatal.

As a credit consultant, I am often called in too late to a business where the wheels have fallen off, and the hubs, axles, and chassis are dragging on the ground. Undeterred, the owner tells me that if they could only get a bit of funding, they would be able to get through the struggle and make the business great again. Now there are instances where this is true – for example when an unforeseen event like Covid or an earthquake occurs, and the “business as usual” model is not practical for some time. In many cases, this is not so, and the short-term fix will not correct the long-term problems. Systemic business issues will often be more evident in times of stress or turmoil, highlighting problems already there.

The solution isn’t always working more, rather than analysing and addressing the issues, business owners often think they need to work more and find more clients. If your business issues are ones such as miscalculated margins or poorly managed projects, these will only be made worse by volume. Upscaling profits and upscaling problems often look the same from an input perspective but are vastly different from an output one if the underlying issues are not found and corrected.

Having an impartial business advisor or mentor periodically look over your systems and processes could point out these problem areas before they become business killers. Often, however, I am called in after the issues have grown into monsters and the overworked owner is putting massive effort into putting out fires, and a decision must be made. Do they carry on working themselves half to death until someone else, such as the IRD or an unpaid creditor, decides it is time for them to stop through a liquidation? Or do they pause, see the situation for what it is and make an exit plan that leaves them intact from a financial and reputation perspective. In business, people have long memories and bowing out gracefully without a legion of unpaid creditors and crippling personal debt is much easier to come back from than the alternative.

Loans given to struggling businesses are nearly always very high in interest. Given the probably insolvent position of the applicant business, loans will be secured with, at the very least, a personal guarantee and probably a security over personal assets such as property. I have seen business owners lose houses, go bankrupt, and ruin their lives. I have even seen a few unfortunate cases where the business owners took their own lives for simply not knowing when to call it quits.

If you are ever in the position where the options are to cease business or go all in with everything you have, take some time with an independent advisor that can give you the cold hard facts regarding the business’ real-world chances of survival before you leap. Your life may very well depend on it. Just a thought.

I had a meeting last week with an earthworks company, and one of their comments was that I don’t need terms of trade or to be a secured creditor because I only deal with large construction companies! My response was, “remember Mainzeal, Ebert, Orange H, weren’t they also large construction companies? Being a small supplier to a large company doesn’t make you safer it simply makes you part of a larger group, be that a large group that gets paid or doesn’t get paid remains to be seen.

The other main risk I have seen with small subcontractors working exclusively with one large client on a large project is that to secure the work, there are often multiple tenders or bids. To have a good chance of success amongst many competitors, the bids are often at a very low margin with the hope that the quantity of work will make up for the lower margin. In my experience, a low margin is a low margin irrespective of the job size. With it comes the risk of unexpected costs and unforeseen difficulties, making a low margin situation a no margin situation.

Another is that many of the subcontractor agreements that the large companies have the subcontractors sign are blatantly one-sided and because the company may have done hundreds of these types of projects, you better believe that every single clause in the contract is there to protect the company from loss and is based on something that does and has happened. Loss never disappears, it is always experienced by someone, and these companies hire professionals whose entire role is to ensure that it is not the company. 

A few months ago, I read this clause in a subcontractor agreement that a client had been asked to sign ” the contractor agrees that they will not increase the quoted price irrespective of changes made to plans, specifications or requirements”. Agreeing to this would be ill-advised and could be financial suicide. Now I’m not saying that just because a construction company is large, they are in some way unethical or predatory, but in a situation where something unforeseen happens that impacts the potential profit of a job, it is essential that both parties are on the bus, not one driving and one underneath. When one of the largest and oldest companies in New Zealand history can lose more than $100m on a single job, it shows that it can happen to anyone.

Entering into unsecured, unequal agreements to get the work is similar to playing rugby against a team when only one of you has a set of goalposts. They also have the referee on the payroll or getting married, and only one party writes the vows (goodness, only knows what I would have agreed to if my wife wrote our vows!). If the only difference I ever make to a business is making them a secured creditor and helping them enter more equal contractual relationships, I would consider my involvement a success.