Thursday, May 19, 2016

How I reduce counterparty risk in my work

I was reading Investment moat's article on recent soilbuild's issuance of writ of summons to Technics Oil & Gas Limited. Soilbuild is seeking to claim back about $2 mil in rent plus an additional $12 mil in deposit for the second year of rent, with interest owed during the period where they didn't pay the rent. Counter party risk is hard to account for, but it's something we need to pay attention to in the real world.

As a private tutor, I have to deal with counter party risk as well. When I was a newbie in my first few years of work, I had issues collecting my fee from students too. One is recommended by a tuition agency, so it's subjected to terms and conditions that I had not read in full. Since it is the first month of tutoring that student, the student had to make payments to me as well as the agency separately. Apparently the agency do not trust the tutors they recommended to collect on their behalf, which is usually the norm. Anyway, the student refuse to pay the agency but he did pay me, but due to the contractual terms that I've signed but not read, they have the right to claim it from me. I continued giving lessons without getting paid since he is doing his O'lvls. On hindsight, that's just stupid. The thing just bounced back and fro and got real ugly, and I do not wish to revisit this again.

To avoid this, I stopped giving lessons the instant I realise something is wrong. Cut loss, so to speak.

The second notable case is for a really really wealthy expat who lives around Orchard area. They just refused to pay me one day, and I'm not sure why. I cut the lessons and hounded them to pay me my deserved pay. They disputed the dates that I've recorded, yet they do not keep track of the dates that I gave lessons for their son. Eventually this ended well and I collected my fees after a few months in full. It could have ended badly too.

These days, I treat counter party risk like these by managing them. I think given time, it's bound to happen again. Thankfully, there's no third case of bad debts anymore after I've done the following:

1. For new students who cold called me, I collect fees in advance of 4 lessons. Fully refundable, should they give me notice of not wanting to continue. Since most students come over to my place for lessons now, I take more risk than them. If I'm going over, I'm more willing to bend and will try collecting fees in advance. If they hesitate, then it'll be 2 lessons in advance. I hate collecting after every lessons, though some parents insist.

2. For new students who are recommended by known others, I'm more lax. They are sort of filtered by existing contacts already, so they are less risky. I will collect 4 lessons in advance as a general rule, but willing to bend to collect the fees after the service is rendered. Usually credit term is for 1 month, and not longer.

3. For those students that have more than one lesson with me, meaning 8 lessons in a typical month, I will collect after every 4 lessons too. This is to reduce the absolute amount of the fees owed. If there is a default on payment for 8 lessons by 1 student, it's equivalent to a default on payment for 4 lessons by 2 students, and that is not good for me.

4. Some cases you just know that there something doesn't feel right. It could be the way the parents interrogate you when they are asking for quotes on the tuition fees. It could be the way the parents make some unreasonable demands when they call. Usually I will reject cases like this when my gut instinct tells me to. It's rare, but on occasions I didn't heed my instincts, the reward just didn't go along with the downside. In other words, it's a troublesome case that is not worth the effort. This kind of discretionary rejection is rare. Most people are nice.

5. I charge higher fees. It sounds weird, but charging higher fees actual reduce counter party risk. Maybe people feel they are dealing with more qualified tutors as opposed to the initial years when I'm charging like about $22/hr.

And these are just the way to manage default on payment of the fees owed. Who says a private tutor is having the easy way out? He has to manage his portfolio of students like how a reit manager would do to manage his tenant mix and occupancy!


la papillion said...

Hi temperament,

Yea, some pple think it's easy. Free money or easy money. Not as simple, haha

Rolf Suey said...

Hi LP,

I remembered in the first year of teaching, my neighbour who apparently had financial difficulties and history of mental problems, seeing that I was giving tuition approached me that his son needs tuition too. I was only 19 years of age back then. I was hesitant but my mum being kind-hearted seeing that my neighbour's son had nobody to guide persuaded me to help.

After few lessons, they defaulted. Not only that, even at times of non-tuition days, my neighbour will ask his son to come over my place to do his homework. Eventually I stopped, and of course never collect back my money. It never turn ugly, but I feel a bit awkward being neighbour.

Since then, I am pretty focused on the few students who have a more decent financial background and were mainly via recommendation. For one student, the relationship is 10 years and the rest, it was also for several years usually.

And yes, they always pay in advance one month's tuition fees.

I understand in your case full-time tuition is very difficult to judge the background of the students. Hence, due diligent counts!

good luck in continuing to serve the people in this country!

la papillion said...

Hi Rolf,

Thanks for sharing your experiences :)

Actually by charging higher, I already avoided a lot of problems. But it somehow doesn't gel with me, hence this few years I'm doing what I can to help those students who needs the tuition but can't afford it. Not surprisingly, I encountered more problems. Not trying to stereotype, but some are really demanding, like asking me to squeeze in another subject or two within the allocated time, or constantly asking me the whereabouts of their kids, or delayed payment etc. It would seem that I'm purposely going into a troubled area!

As long as the bulk of my lessons are stable, I can continue doing such work. I think it adds a new dimension of meaning to my work. Not all about the money eh? haha

TheValueFund said...


You can remove the counterparty risk by securitising the student debt and forward earnings. One can create a CDO for you with a coupon payment for the next 1, 3 and 5 yrs of payments from the current set of students. Sell to all the investors, aunties and uncles who read your blog.

I can create one and claim just small commission as long time internet friend.


la papillion said...


HAHA, nice one on the CDO for tuition! If I ever going to do one, you'll be the first to rope you in ;) LOL

Rainbow said...

Good post on counter-party risk put into simple terms in daily life encounters. I always had trouble understanding all those terms on articles when they talk about a company has this risk, that risk.

When I gave tuition last time, I always make it a point for my students to sign the lesson attendance sheet. They have a copy too which I would sign and acknowledge every time I received payment from them. :)

la papillion said...

Hi 22°C,

Haha, thanks :) I have my own records, but I don't want to make the whole experience like some factory punchcard, hence I don't want to have the lesson attendance sheet. So far so good haha :)