By Robert Edge, below, Partner, Devonshires
With average levels of bad debt rising at small firms, it is vital that business owners take steps to help minimise the risk of late payments and recover money more quickly should they need to do so. Some simple measures can make a significant difference:
Be prompt
It may sound obvious, but SMEs need to ensure they invoice as soon as payments become due. Make sure you state how long they have to pay the invoice. This is usually 30 days but depends on the credit terms.
Think prevention
Put in place preventative measures to avoid bad debt. Ensure all customers are credit checked, especially if you have a customer that you allow to pay for goods/services after they have received them. If you have terms and conditions, get them signed and set strict credit limits. This helps to reduce the risk of payment being received late.
Don’t be shy in pursuing late payments
While SMEs should be prompt in invoicing, they should also not delay in pursuing late payments. Many may not realise but the initial demand is a vital tool. The demand should be clear and state why and when the payments were due and for what reason. It is wise to include copies of the relevant invoices, a statement of account and a copy of the contractual payment terms. By doing this you pre-empt the all too familiar excuses that they are unaware of the position or that they don’t have the applicable documentation to hand. Finally, and possibly most crucially, the demand should make clear the options that are open to you should they fail to make payment including a claim for accrued interest.
Be persistent
If a customer delays payment, be persistent. Make sure that you follow up a late payment and if a promise to pay is made, follow up again on the date payment was promised. If you do this by phone, send an email afterwards so that you have a record of the conversation in writing.
Abide by clear procedure
Have a clear procedure in place that you follow when a debt is not paid – for example, send the invoice/statement by your customer’s preferred method after you have provided the goods or service, check there are no disputes, and investigate the reason for non-payment. If this is due to financial difficulties, consider a payment proposal plan.
Be professional
Although this may sound like an obvious point for any business or individual, it is important to always be professional when dealing with your customers. This eliminates the risk of the debtor using this as an excuse to avoid making payment.
What are the options available if debtors fail to pay?
We always tell clients that if the first or second demand falls on deaf ears then there is little point in following it up with a third or fourth demand. If they don’t pay up on the first request repeated demands are unlikely to make any difference and a waste of manpower.
Instead, one of the options available to you is to make a demand for accrued interest. This demand can be made at the outset or on later reminders, and we find it does focus the minds of debtors. It of course depends on the nature of your relationship with the debtor. If there is a longstanding relationship between your business and the debtor, then demanding interest may not be something you want to do straight away.
How much interest can you charge?
The amount of contractual interest you can charge should be covered by your terms of agreement, but if it’s not then statutory interest may be claimed in accordance with the Late Payment of Commercial Debts (Interest) Act 1998, for business-to-business transactions. This is at a rate of 8% above the Bank of England base rate. Not only can this mean interest amounting to a considerable sum but within these provisions a fixed sum may also be claimed. This sum is dependent upon the value of the invoice ranging from £40 to £100 for an invoice exceeding £10,000. Furthermore, these costs may be applied to each outstanding invoice so should the debt relate to multiple payments then the costs can total a significant amount.
Find out why the debtor can’t pay
While reminding debtors that you can charge interest the main thing SMEs need to do is to find out the reason the debtor is unable to pay. This is usually a cashflow problem and a payment plan can be worked out. It is always preferable to have good lines of communication so matters can be resolved amicably and, most importantly, SMEs get paid.
Additionally, developing a reputation for not allowing debts to go unpaid for lengthy periods is no bad thing in our experience. It will make debtors think twice about delaying payment in future.
What can SMEs do if payment still isn’t forthcoming?
The final option open to SMEs is legal action. Threatening proceedings usually has the desired effect with the debtor picking up the phone to discuss the matter, but if it doesn’t then a claim needs to be issued. For this a claim form needs to be drafted and presented to the applicable court. If the debtor fails to reply to the claim within 14 days then default judgment may be immediately requested and if obtained allows enforcement, such as High Court Enforcement Officers attending upon your debtor or a charge being put on their property.
The alternative, where £750 or more is owed by a company or partnership and liability is undisputed, is issuing a winding up petition. This generally results in the company’s accounts being frozen by their own bankers and most likely stop them from trading hence more often than not your debtor shall engage as to settlement.
No business should suffer the consequences of another withholding payment, especially in the current economic turmoil, so make sure you keep on top of money owed to your business.
