Here are some tips about protecting your business against the risk of bad debt or late payments.
- Consider what methods of payment you are happy to accept from customers. Retail businesses, more than other types of business, need to be flexible on this point but credit and debit card systems offer protection to the seller that is not affected by subsequent changes in the customer’s circumstances.
- Decide in advance what your firm’s policy is to be with regard to late payment of amounts owed to you. Many firms incorporate interest clauses in their payment terms which provide for interest to be charged on debts paid late. Regardless of whether you do this, any business that is paid ‘late’ (which means beyond the contractual payment period) is entitled to charge statutory interest (8% above the prevailing base rate) on top of the amount owed.
- Ensure that you send out any invoices promptly, with the name and address of your business clearly and accurately stated along with your payment terms. If you intend to take advantage of your statutory entitlement to charge interest on late debts, you do not need to formally announce this, although doing so may act as an additional incentive to the customer to pay promptly.
- Keep an eye on your outstanding invoices and chase debtors up if your payment fails to turn up when it should. Resources permitting, it makes sense for a business to liaise with its debtors prior to the payment date and not just after.
Collecting your debts
If despite your efforts you still have not been paid, what are your options?
- You could ask your solicitor to send a letter to the debtor, stating or implying the consequences of a continued failure to pay. A well-worded letter will often produce the desired outcome.
- You could sell your invoices to a factoring company or approach a debt recovery firm to chase the debt for you. This will relieve you of the debt and save the embarrassment of direct confrontation, but you will have to pay a fee for the privilege. A list of recovery agencies can be found on the web site of the Credit Services Association, at www.csa-uk.com
- You can take action to recover your debt through the courts. For debts of up to £15,000, you will go through the county court. The court will allocate your claim to one of three streams, according to the value of the debt – claims of up to £5,000 will go through the small claims process, popularly known as the ‘small claims court’. Should you win your case in the small claims court, you may be allowed to claim costs, including legal costs, against the other side. Claims can be filed in person at your local county court or alternatively can be made out online via www.moneyclaim.gov.uk.
- If all else fails, then, depending on the size of the debt owed, an unsatisfied creditor can initiate action to make the debtor insolvent. Where the outstanding amount is at least £750, an unpaid creditor can serve on the debtor a statutory demand for payment – if the demand is not paid within three weeks, you are entitled to present a petition for the debtor to be made bankrupt (in the case of an individual) or to be wound up (in the case of a company). This route is not dependent on the exhaustion of other recovery options and very often, the presentation of a statutory demand concentrates minds and causes the debtor company to pay up.
Stuck in the middle?
Managing cash flow will always involve juggling receipts and payments, and businesses will very often be debtor and creditor at the same time. Firms can find themselves in a difficult situation like this through no fault of their own – very often, smaller firms in particular are kept waiting for payment by a major debtor and as a direct consequence of that can struggle to pay their own creditors.
Where you are debtor and creditor to the same party at the same time, then you can negotiate the set-off of one of the outstanding amounts against the other. Otherwise, the fact that you are awaiting payment yourself does not affect your liability to your own creditors and they will be entitled to exert pressure on you to pay up and if necessary resort to recovery procedures. This situation requires careful management, especially if the creditor is a person or business whose custom you value and with whom you wish to continue doing business.
Cash-flow problems are an ongoing challenge for businesses. As with anything, it is easier to prevent problems than resolve them, so I would advise any firm to discuss the adequacy of their credit and debt management practices with their accountants.
John Davies – ACCA Head of Business Law