Be Wary of Extending Credit to Parent Companies

The following illustrates why a business has to always be careful before extending credit to customers. It is always better to turn business down than to extend credit and not receive payment for your products and services.

Losing a customer because you have refused to provide credit may impact the growth of your business but not receiving payment for your products and services may cause your business to fail.

1. Facts

A small business (XYZ Pty Ltd) had a new customer (ABC Pty Ltd). A credit application form was completed so XYZ Pty Ltd felt quite comfortable in offering credit to their new customer, even though a personal guarantee was not completed. However, no ASIC check was performed to verify the information completed by the customer.

All goes well for a while, but gradually the amount of credit outstanding became higher and higher, and most of it was outstanding for quite some time and it is looking increasingly likely that it won’t be paid.

2. So what went wrong?

To find out what went wrong, XYZ Pty Ltd decided to do an ASIC check. The first thing they discovered is that the company they had been dealing with was owned by a parent company. The ASIC search also revealed that the parent company had the same directors as ABC Pty Ltd (the company that XYZ Pty Ltd had been dealing with). In turn, these directors were also shareholders of the parent company.

When ABC Pty Ltd was subsequently placed into receivership it showed that there were no real assets other than a few thousand dollars, whereas the liabilities were in excess of $900,000. The same could not be said of the parent company that retained all the equipment and capital investments that ABC Pty Ltd had been using during its business operations. It appeared that ABC Pty Ltd had been making cash payments to the parent company in the form of high fees and high rental costs.

In addition, all the real assets (such as plant and equipment) were owned by the parent company. The parent was well off and could eventually distribute its profits to its shareholders – but this would not help XYZ Pty Ltd in recovering money owed by ABC Pty Ltd.

3. What could have been done differently?

If an ASIC check had been performed at the start, it is very unlikely that XYZ Pty Ltd would have considered doing business with them. Now XYZ Pty Ltd has a credit application and personal guarantee provided with each new client and engages Brodie Collection Services to perform an ASIC company search and property title search of the guarantor before they offer credit terms to any new customers. XYZ Pty Ltd now know that it is well worthwhile when you consider the alternative of losing thousands of dollars of bad debt. As you are aware bad debt comes off the bottom line of your P & L, that simply means less profit to the company.

Brodie Collection Services is one of Australia’s leading debt collection firms, with offices in Melbourne and Brisbane. They can provide ASIC search services from a low $46.50. They also provide debt collection services on a no collection, no charge basis. You can trust them with all your debt recovery needs. Visit www.brodiecollectionservices.com.au to find out more about the debt collector services that are offered by Brodie Collection Services or call us on 1300 276 343.

This information provides a general summary only and is not intended to provide specific advice for your individual circumstances. It is not a substitute for professional advice and should not be relied upon as such.

2018-07-23T16:53:59+00:00