Video · 2:59

When a customer will not pay your invoice

2:59 · Posted 5 February 2019 on the HomeSec YouTube channel

Paul Stone on a business owed money by a customer who owns property: rather than months in court, the customer borrows against that property, pays the invoice, and repays the loan from a later sale or refinance.

In short

If the customer who owes you owns property, they may be able to borrow against it and pay you now, rather than after a sale, a refinance or a court case.
Paul's case: a truck repairer owed for work on three trucks, with no equity of his own to borrow against, and a customer promising to pay once some investment properties were sold or refinanced.
The suggestion: the repairer's solicitor tells the customer there is a quicker way to settle, a loan secured on the customer's own property and repaid when that sale or refinance happens.
A company that owes $4,000 or more can be served a statutory demand, which gives it 21 days to pay before it is presumed insolvent.

Paul's story

The owner of a truck repair business, whom Paul calls Jim, rang HomeSec needing money in a hurry to buy parts and pay wages. A major customer had not paid for work on three of its trucks. The usual answer, a loan secured on Jim's own property, was not available: he had no equity in his home and no other real estate. He was seeing his solicitor that afternoon to start legal action. The customer had told Jim he would pay, but only after selling or refinancing some of his investment properties, which could take months, and, as Paul says, might be nothing more than a delay tactic.

Turning the customer's promise into the exit

Paul's suggestion was to look at the problem from the other side. The customer owned property and had already named the event that would let him pay. To a property-secured lender, that is most of a loan application: real estate with equity, a business purpose and an exit. So Jim's solicitor rings the customer, explains that legal action is about to start, and adds that there is a way to settle the debt within days, a loan secured on the customer's own property. Jim is paid straightaway instead of after months in court. The customer avoids legal costs and the risk of a winding up application, and keeps his trade relationship. The lender is repaid when the investment properties are sold or refinanced, which is what the customer intended all along.

What to do this week if you are owed money

Put the debt in writing. A final invoice or letter of demand with the amount, the work it covers and a date for payment.
Find out what the customer can draw on. Customers who say they will pay "once something sells" usually own the something, and that changes your options.
Ask your solicitor about a statutory demand. If the customer is a company and owes $4,000 or more, a demand gives it 21 days to pay or apply to the court to set it aside. It is a serious step and the paperwork has to be right.
Tell the customer the option exists. Directly or through your solicitor: a property-secured loan can turn their promise into payment.
Fund your own gap meanwhile. If you own property, the same kind of loan can carry your wages and suppliers until the money arrives; the guide to a business cash flow crisis helps sort out which deadline to deal with first.

If you are the customer in this story

Paul's second tip turns the story round. A business that owes money to suppliers or the ATO, and owns property, can clear the debt now and repay the loan later from the sale, refinance or payment it was waiting for. Doing that before a creditor reaches for a statutory demand keeps the matter out of court, and the guide on funding to pay a statutory demand sets out both 21-day clocks if a demand has already arrived. The loan sizes from the property's equity, anywhere from $20,000 to $5,000,000.

Questions people ask next

Can I make my customer take out a loan to pay me?

No, and it is not worth trying. What you can do is tell them, or have your solicitor tell them, that the option exists. The loan would be theirs: they apply, their property is the security, the purpose is paying a business debt, and the lender assesses it on its own terms.

Does this work if my customer has gone into administration?

Usually not. Once an administrator or liquidator is appointed they control the company's property, and an unsecured creditor generally becomes one claim among many rather than someone the company can simply choose to pay. What to do when a customer goes into administration covers recovery and how to fund the hole it leaves.

My business is the one that owes the money. Can the same approach help me?

Yes, if you own property with equity and the debt is a business one. A loan secured on that property can pay the creditor, the ATO or a supplier now, with interest capitalised for up to 6 months, and be repaid from the sale, refinance or payment you were waiting on, before a creditor has to go to court.

The full guide

The video is the short version. The written guide has the detail: funding to pay a statutory demand.

To talk it through about your own property, ring a Lending Manager on 1300 93 83 87, Mon–Fri, 8:30am – 5:30pm Melbourne time.