RSS feedsMore than 80% of SMEs believe that incidences of late payment are increasing and around 70% estimate that the cost to their business is between £1,000 and £25,000, according to a recent survey by the Forum of Private Businesses.
Not only can this cause serious cashflow problems and reduce profits, it can also be incredibly time-consuming to chase bad debts - time that could be more productively spent elsewhere in the business.
Prevention is better than cure. There are steps that you can advise your clients to take to minimise the risk of a bad debt arising in the first place.
First, ensure your client knows exactly who its customers are. They need to check the full name and ask for bank details, contact addresses and telephone numbers.
For new customers, they should undertake a credit check and take references from their bank or other trading partners. They can obtain their last set of audited accounts from Companies House and check whether they are in any form of insolvency process. They should also check whether they have any county court judgements registered against them with Registry Trust Limited.
Terms and conditions
Businesses should have a robust set of standard terms and conditions that specify:
• What their credit period is; the default position under the Late Payment of
Commercial Debts (Interest) Act 1998 is 30 days.
• The interest rate for late payment. The Late Payment Act provides for a
default interest rate of 8% above the Bank of England base rate for supplies to
other businesses.
• In the case of supply of goods, a retention of title clause can entitle your
client to recover goods if payment is not made.
Additional measures include:
• Ensure your client’s terms and conditions are incorporated into the
contracts it makes with its customers. Those terms should be brought to the
customer’s attention at the outset and before any order is placed. Any order
form should include an express statement immediately before signature stating
that the order is placed on the terms set out in that document.
• Incentives can be offered for prompt payment; for example, a discount can be
given if payment is made in a set number of days.
• Your client can ask for payment on account, or at least a deposit before
starting any work or supplying any goods.
• Accurate invoices should be rendered as soon as the work is completed or the
goods supplied.
• A third-party guarantee can be obtained (for example, from the directors of
the company) to provide a further avenue to pursue in the event of a default and
to incentivise those running the company to ensure it pays its debts on time.
• Your client should consider taking out credit insurance, which pays out on bad
debts if a customer becomes insolvent, or legal expenses insurance to cover the
costs of taking action to recover bad debts.
• Explore factoring or invoice discounting arrangements if late payment could
have a serious effect on your client’s cashflow.
Effective credit control is fundamental. A system should accurately track each invoice and a chase should be made on the first day an invoice becomes overdue. Your client should try and find out why payment has not been made. Help your client decide whether it wants to retain the business of that customer going forward.
Once the credit control process has been exhausted, the next step is usually a sternly worded solicitor’s letter, setting out details of the debt, any interest that has accrued and demanding that payment in full is made within a short timeframe.
The debtor may respond by offering a repayment schedule. If this is acceptable, your client should set out clearly what will happen if there is a default on payment of any instalment; usually, any default will render the entire balance immediately payable. Post-dated cheques can be an effective payment mechanism: If any cheque does not clear, your client could obtain an early judgement if proceedings are issued against the debtor.
If no payment is made, legal proceedings will be necessary to recover the debt.
However, before funds are committed to legal action, it’s worth considering whether the debtor is likely to have any money to pay. Also consider whether there is likely to be a dispute over the quality of the goods or services supplied, which could result in lengthy and costly litigation.
Once legal proceedings have been served, the debtor has 14 days to act. Starting proceedings brings matters to a head as the debtor can no longer ignore a claim. If it fails to pay or respond within 14 days, judgement can be entered in default, which can then be enforced against the assets of the debtor. A county court judgement (CCJ) will also be registered against the debtor’s name and will affect its ability to get credit in the future.
A court fee is payable to start proceedings. The fee is calculated on a sliding scale according to the value of the debt. If solicitors are instructed to act for your client, their fees will also be incurred. Officers can now represent their companies in legal proceedings so it is not essential to instruct a solicitor. The relevant court forms are available for free on the Court Service website, which also contains useful information about starting proceedings. Debts of up to £100,000 can also now be pursued online using the Court Services’ Money Claim OnLine service.
If your client does instruct a solicitor, recovering the costs will depend on the value of the claim, whether your client wins and whether they conduct themselves reasonably in the course of the litigation. For small claims matters (up to £5,000), it is usually possible to recover legal costs of up to £100 for issuing the claim and any court fees paid out. For larger cases, it is generally possible to recover around 60% to 65% of the legal costs if your client wins, assuming of course that the debtor is good for the money.
Enforcing the judgement
Once your client has a judgement, it may need to be enforced against the assets of the debtor. The most appropriate enforcement method will depend on what your client knows about the debtor’s assets. If it owns property, your client can apply for a charge to be placed on that property and ultimately seek an order for sale. If it is owed money by someone else, such as its bank, an order can be obtained requiring that third party to pay monies directly to your client to satisfy the judgement. If the debtor is an individual in employment, an order can be obtained requiring their employer to pay part of their salary to your client each month until the debt is extinguished. A bailiff can also be sent to seize goods and sell them at auction to raise funds to pay your client’s debt.
If your client’s debt is for more than £750 and there are no grounds to dispute that the money is owed, a statutory demand can be served on the debtor as an alternative to starting court proceedings. This is the first step in insolvency proceedings. The debtor has 21 days from the date that they are served with the demand to pay the monies owed. If they don’t, your client can then present a petition for their bankruptcy, if the debtor is an individual, or to wind up the company in the case of a corporate debtor.
This is an extremely persuasive stick to use to obtain payment. But bear in mind that your client may be one of a number of creditors and being the person who puts the debtor company into liquidation or makes an individual bankrupt will not confer any priority on your client as a creditor or provide your client with any security.
Act quickly and decisively but be prepared to consider sensible settlement proposals. It is better to make some recovery now than be one in a line of creditors hoping to recover a few pence in the pound in an insolvency.
Act now to head off problems later
A cheque from a customer of your client has bounced. Another customer claims never to have received the invoice. Yet another customer is avoiding the credit controller’s calls.
Now may be a good time to revisit who your client does business with and the terms on which they supply goods or services.
Does your client know who they are contracting with and whether they are likely to pay? Are its standard terms of business sufficiently robust to provide protection in the event that payment is late? Does its sales team know to ensure that any business transacted is on the standard terms?
Is it worth your client protecting its revenue by taking out some form of insurance or entering into some form of factoring arrangement?
The quick and efficient recovery of bad debts is an issue that every business
faces.
More likely than not, your client will be one of a number of creditors and often
the creditor who acts quickly and decisively will be the one who obtains
payment.
Your client cannot afford to delay. Its credit control procedures should provide for an escalation of contact, starting with a chase by telephone, through to a solicitor’s letter before action and culminating in legal proceedings.
Don’t make it worse
It is all very well obtaining judgement but does the debtor have any assets to enforce it against?
A balancing exercise is required before commencing legal action. You do not want to make a bad situation worse by throwing good money after bad if there is little prospect of actually making a recovery.
This underlines the need for your client to carry out some due diligence on potential new customers so they can form a view at the outset as to how likely they are to pay for the work that your client does, or the goods that your client supplies and, if they default, whether they have sufficient means to enable your client to make a recovery.
www.registry-trust.org.uk
www.courtservice.gov.uk
www.moneyclaim.gov.uk
Clare MacKay is a solicitor at
SA Law
