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Don’t Let Late Payers Send You to the Wall

By Jon Sawyer on 07/10/2014 - 0 Comments

This was the heading in a recent article published in the Sunday Times business section (5/10/14), and should resonate with many SME business owners.

Collecting debts is one of the biggest challenges facing business owners as many wait months to be paid which starves the business of much needed cash flow. Many companies lack a solid credit control policy and have no formal systems in place to collect debts which makes it easy for some debtors to grab a few extra months credit, the effect of which can be crippling for the business owner. This article sets out the challenges business owners face and sets out the options that may be used to help resolve challenges in collecting monies due.

In the same Sunday Times article research conducted by Market Invoice (an invoice financing platform) found that more than 60% of small companies are paid late. Their study found that of 6,000 invoices they found that 10% of these were paid more than 30 days after the due date. In ICON’s experience, this position is not unusual as many clients we meet have debts significantly beyond 60 days which may increase the risk of bad debts. Fear of damaging a business relationship with a client is typically the motivation for not getting tough, but the reality is that failure to collect monies due is a killer of many businesses. Vince Cable, the business secretary is attempting to bring in rules forcing larger firms to publish their payment terms so business owners can be more informed before embarking on a business relationship. This is expected to be in force by March 2015 but is not likely to go far enough to solve the problem. So what can a business owner do?

Firstly, it is important to recognise that your clients may not intentionally set out to delay in making payments, but they may simply take advantage of those companies that have poor credit control practices. In order to avoid having a huge list of accounts receivables spread over 60-90-120 days and beyond it is imperative to have a sound credit control process. This will require the following:

This will require deciding which actions are most appropriate based on your relationship with the client and previous trading history, amount of debt and over which time period. A summary of options for collection of monies is listed below:

For Debts at 30-60 days

Send payment reminders by email and post and call to advise accordingly. It is important to find out the name and email address of the person responsible for paying the bills. On contacting the debtor, find out the best time to contact the person responsible for paying the bills and contact them directly and document agreed actions, and follow up with the details in writing. In your dealings, always be courteous and professional and make the client aware that you are calling in relation to an invoice (rather than a debt), and make sure you create a sense of urgency and a deadline for action or response back.

Be persistent in this time period to get the problem resolved and as a final resort make them aware of other options you can impose.
Any further actions for any debts exceeding 60 days should be agreed by the business owner who is due the funds at which time a strategy for collection of the debt needs to be agreed. Any threat of legal action for example may normally be sufficient to get your client to pay.

Be sensitive to companies requesting payment terms, but don’t fear getting tough if you need to. The main requirement is to document the process clearly and advise the debtor in writing of exactly the action you are taking. Discuss which approach to take as this may be different according to the customer and amount owed. There are 3 main options for this which have been classified as follows:

  1. Statutory Interest and Charges for Late Payments
  2. Mediation
  3. Legal Options – either through the County Court or via insolvency proceedings

1. Statutory Interest and Charges for Late Payments

a. Impose Interest on Late Payments

According to government regulations (www.gov.uk/late-commercial-payments-interest-debt-recovery), you can claim interest and debt recover costs if another business is late paying for goods or services. These guidelines state that if you haven’t already agreed when the money will be paid, the payment is deemed to be late after 30 days if either:

The interest you can charge if another company is late paying is ‘statutory interest’ and is 8% plus the Bank of England interest rate.


b. Debt recovery costs on late payments

This is a fixed sum for recovering a payment on top of claiming interest on it, and is based on a fixed value according to the amount of debt as follows:

Amount of debt   What you can charge
Up to £999.99 £40
£1,000 - £9,999.99 £70
£10,000+ £100


2. Meeting Direct with Client and Mediation

This may be a vital last step before any tougher action is taken and may be quicker and cheaper than going to court and requires both sides to hammer out a settlement. There are many companies that provide a mediation service and details can be found on the following link: www.civilmediation.org

3. Legal Options

a. Collections via the County Court

Under this option proceedings need to be issued against the customer, and if the claim is successful you will be awarded a county court judgement requiring the debtor to make a payment to you. The cost of issuing proceedings can be found on the following link: https://www.gov.uk/make-court-claim-for-money/overview.

If the judgement remains unpaid there are a variety of options which can enforce the judgement including:

A Warrant of Execution – where the bailiff will visit the company to collect the money or seize goods to the value of the debt. This is a good option if the debt is less than £5,000.

Third Party Orders – where the debtor is stopped from taking money out of their account until you are paid.

Charging Orders – this is where a charge is placed on the debtor’s property such as a house or piece of land.

b. Insolvency Proceedings

In cases where the debt exceeds £750 then insolvency proceedings may be more effective than county court proceedings. Part of the process for this is to issue a statutory demand requesting the debtor to pay within 21 days. Failure to do so will result in the business owner due the money to be able to issue ending up proceedings.

Whichever route is chosen the application of the process needs to be consistent and clearly documented and communicated onward to the debtor. There are debt collection agencies who can help in this process.

Whether or not you employ a debt collection agency or manage the credit control function in-house, collecting monies due on a timely basis is key to the survival of any business. You may also want to review whether you seek additional help such as invoice financing and factoring. In any event, prompt payment of invoices will improve your cash flow.

Having a robust credit control system in place will help you identify potential disputes so these can be resolved quickly thereby reducing debtor days. The key to the whole management of credit control is to have a robust system with regular financial aged debtor reporting. Remember that getting tough with a customer does not mean that you will lose their business in the future.

Failure to act quickly however does increase the risk of bad debts.

The important lesson is "keep speaking to your customers".

Time to act now.

 

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