Having an effective debt recovery system in place is a necessity for all businesses. For any business, late payment of debts can have an adverse effect on cash flow, affecting the ability of the business to pay its own debts. In this article we set out some practical advice on how best to recover your debts in an efficient and timely manner.
Credit checks - know your debtor
Before entering into any business relationship, it is important to ascertain whether the other party has the ability to pay for your services/goods. A credit check at the outset is therefore a must before any transaction is entered into, with a follow up with the other party if it reveals any worrying trends.
It may also be appropriate to set very tight credit limits and/or to give consideration to asking the other party to pay for your services/goods in advance or to request an initial deposit or payment on account of your charges. We would also recommend that regular credit checks are undertaken at various stages of any ongoing relationship to ensure that your customer remains financially viable.
Undertaking a credit check should also mean consideration is given as to the correct identity of your potential customer. In our experience, the debt recovery process can often be frustrated because of an inability to name the contracting party correctly. At its simplest, there are four main types of legal entities – a limited company (private or public), a partnership, limited liability partnership or a sole trader.
At the outset you should ensure that you have sufficient information (if possible corroborated by documentary evidence) showing the legal status of prospective customers and watch for any changes of status at a later stage such as a sole trader incorporating his business.
Terms of business
Often the seller of services/goods will seek to trade subject to their standard terms of business. However, this will only be possible if these terms are incorporated into the contract – the best terms of business in the world count for nothing if they do not form part of the contract. Whether the terms are incorporated or not will be a question of fact in each case. Generally terms are likely to be incorporated if they were sent to your customer prior to commencement of the contract and before the customer incurred any liability to pay charges/fees provided your customer did not in turn attempt to incorporate its own terms of business. If your customer forwards their own terms you should take immediate steps to make it clear these are rejected and that you are trading subject to your own terms.
Standard terms of business should include your business’ terms as regards, for example, credit terms, payment terms, the process for returning goods/raising credit notes as well as the consequences of non-payment of your invoices. It is also often sensible to include limitation of liability and/or exclusion clauses and, in the case of a supplier selling goods, retention of title clause. Terms of business are a “living document” and should be regularly reviewed to ensure they remain effective in the light of any changes in the law.
Standard terms of business often include provision for payment of contractual interest in the event that invoices are not paid in accordance with payment terms. However, this is not necessarily essential in order to seek payment of interest for invoices not paid on time. Provided that the debt has arisen as a result of a commercial transaction then all businesses have a statutory right to seek interest, pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”). The annual percentage rate at which interest can be claimed is set twice a year on 1 July and 1 January. Currently, it stands at 8.25% per annum. The Act also provides for the creditor to seek compensation in respect of the costs of recovering the debt in the sum of £40, £70 or £100 depending on the amount of the unpaid debt and, as from March 2013, additional fees incurred in connection with the recovery of the debt can also be claimed.
All businesses should have an established procedure for credit control ensuring that the procedures are processed subject to strict time limits and according to relevant credit limits/ payment terms. Initial contact is often by email or telephone. If by telephone you should ensure detailed notes of these conversations are taken, particularly if the debtor admits the debt is due and owing. If the initial contact does not result in payment of the debt then stage two of the process should involve formal written correspondence seeking repayment of the debt.
Generally businesses will tend to write two or three letters before referring matters to their lawyers. It is always a good idea for the last letter to make it clear that if payment is not now forthcoming within a further fixed period of time (say 7 days) the matter will be referred to your lawyers. If no response is received you should then take immediate steps to send the matter to your lawyers.
Once passed to your lawyers, one final letter before action/letter of demand (depending on whether you wish to pursue court or insolvency proceedings) will usually be sent. Often the fact that you have followed up on your intention to get your lawyers involved, coupled with the threat of issue of proceedings, can result in full payment or at least communications from the debtor agreeing a schedule of repayment. If contact is made your lawyers can withdraw from taking any further action or if no resolution is reached, press on with whatever steps are needed to pursue the debt further.
From October 2017, new procedures are being introduced which will mean that additional further steps will need to be taken by any creditors trading with sole traders (or consumers) before court proceedings can be issued.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.