Recovering debts is a necessary activity for businesses to maintain their cash flow in operations. However, this activity only applies when debts have already been incurred. One of the effective ways to proactively protect a company’s cash flow is to minimize the incidence of bad debts before they occur. In the following article, TNTP’s lawyer will present viewpoints and ways to minimize the rate of bad debt arising from partners in business activities.
1. Analyze the financial capacity of partners before entering into a contract
One way to determine whether a business is stable and valuable when entering into a contract or not is to determine the financial capacity of that business. Typically, partners seek out businesses that always offer attractive promises and profits. However, to ensure that this information is correct, the business should proactively seek information to analyze the financial capacity of the partner. This information can be obtained by consulting their annual financial reports, previous projects that the business has implemented, or evaluations from other partners about that business,…
Having a good financial capacity will help the cooperation process between the two parties become smoother and also ensure that the business has the ability to pay off debts if unforeseen circumstances occur during the cooperation process.
2. Regularly reconcile bad debt with partners
When partners incur debts, the first thing businesses need to do is to regularly reconcile debts every month or quarter to always accurately grasp the amount owed and the confirmation of the partner with that debt. In addition, debt reconciliation is a gentle “reminder” to partners about their obligation to pay off debts.
Debt reconciliation is a necessary document to serve the debt recovery process in the future, so from the early days of debt generation, businesses must quickly send debt reconciliation and request confirmation from the debtor. Sometimes, in cases where partners refuse to verify debts, it will also be an initial indication for the business to suspect the partner’s ability to operate with problems and may incur bad debts in the future, and prepare necessary debt recovery measures.
a) Specific regulations on payment deadlines and dispute resolution in contracts and agreements always require partners to make a deposit or pay a significant portion of the contract value in advance.
In business operations, debts between partners are typically between service providers or buyers. In these cases, the enterprise needs to clearly state in the contract that it requires partners to pay a significant portion of the contract value or order before the enterprise delivers goods or provides services. This is an important provision to limit risks and protect the rights and interests of the enterprise before delivering goods or providing services without receiving payment. However, this provision may be quite disadvantageous to partners, so the enterprise needs to consider including this provision in the contract depending on the importance of the partner to avoid causing them to hesitate to sign the contract and affecting the operation of the enterprise.
b) Specific provisions on penalties for late payment
One of the common causes of partners being willing to pay the bad debt late is the absence of sanctions for this late payment behavior. Enterprises often do not include provisions on penalties for late payment in contracts or agreements because they are concerned that it may make partners feel disadvantaged and not sign the contract. However, in business operations, it is necessary to be clear and these binding provisions will ensure the best protection of the rights and interests of all parties if a dispute arises. At the same time, these provisions will also make partners consider carefully before intending to pay late because they will have to pay a large amount to the enterprise, causing a loss of money in their budget.
c) Specific regulations on dispute resolution agencies
Typically, when entering into a contract, the parties often choose a competent court or a commercial arbitration center to resolve disputes. However, in many cases, businesses without legal experience have mistakenly identified the dispute resolution agency, leading to an unfavorable dispute resolution process if any disputes arise later on. According to legal regulations, the parties in the transaction have the right to choose a dispute resolution agency as long as it is not contrary to the law. However, sometimes there are cases where the same incident has multiple competent authorities to resolve disputes, leading businesses unsure which agency to choose to best protect their legitimate rights and interests. In some cases, such as commercial arbitration centers, they only resolve disputes if the relevant parties have a clause choosing the correct arbitration center to resolve disputes.
The decision on the dispute resolution agency will affect the time, effort, and costs of the business if it proceeds with the litigation to resolve disputes. Therefore, businesses need to research legal regulations accurately to determine the desired dispute resolution agency to protect their legitimate rights and interests.
Above is an article on the topic ” How to minimize the rate of bad debt arising from partners in business activities?
” by TNTP lawyer. Hopefully, this article will be helpful to the operations of businesses.