Are you winning at debt management?
For many businesses, dealing with late or non-paying customers is just part of the course. However, when businesses are finding their feet, or growing quickly, the time and effort required to chase payments can be extremely frustrating and costly.
To tackle the problem of bad debt, businesses need to stay alert and spot signs that a customer contract could be becoming a problem. If a key customer normally pays its invoices on time after 60 or 90 days but payments have recently started to slip – this could be a sign that they are experiencing cash-flow difficulties. Another indicator could be if the customer requests a breakdown of the invoice or a purchase order number. While such requests may of course be entirely justified they could also be symptomatic of financial problems.
For growing businesses, it is especially important to check the credentials of key customers carefully at the outset and monitor the relationship as it develops. They should also keep a close eye on media reports as these could provide advance notice that a customer is heading for business failure. Being forewarned gives the business time to mitigate any financial risks.
It is not unusual for businesses with shorter trading histories to lack the skills and resources to handle debt management issues in house. They may also believe that external debt recovery services are too expensive, when in actual fact most specialist firms operate on a fixed-fee basis; according to the costs that the courts would allow them to recover. As well as helping to recover bad debt more quickly, early intervention can help to prevent the situation from spiraling into a more costly legal dispute.
When selecting a firm to provide debt recovery services, businesses should make sure it has the breadth of capabilities to see the matter through to its conclusion. Some debt recovery agencies are unable to issue county court proceedings, for example, and this can lead to unnecessary delays.
Putting in place clear contractual terms and conditions at the start of a new supply relationship can also help to reduce the risk of bad debt arising. If the business is supplying ‘goods’, for example, it should consider using a retention title clause to ensure that the customer cannot claim the goods as their own until they have for them paid in full. If the customer fails to pay on time, the supplier would be within their rights to take back the goods and sell them to another company.
When dealing with key customers, small and medium-sized businesses can be understandably reluctant to put pressure on them to make payments in a more timely way. There may be a perception that the trading relationship is a valuable one, when in fact hidden financial costs are eroding any profit. In some instances, the customer may put pressure on their supplier to accept longer payment terms or demand discounts. Such behaviour could be a sign that the customer is struggling financially and may have been refused credit elsewhere.
In order to prevent bad debt issues escalating, businesses should make sure they have efficient systems in place. If the customer has signed up to 30-day payment terms, the supplier’s credit manager should ring them promptly if this date has passed. After 45 days, the business should be sending final demands to the customer and if no payment is made by 60 days, a solicitor should be instructed to issue county court proceedings. Making it clear that the business has a strict policy in place to tackle late payment of undisputed invoices can help to lessen the risk of bad debt arising and staying in touch with late payers can sometimes shed light on the extent of the customer’s financial difficulties.
For businesses trading overseas it can obviously be more difficult to recover assets. In such cases, it is usually necessary to use the customer’s local court system and enforcement measures but this can take time and, in some cases, systems may lack the transparency of their UK equivalents. To avoid costly delays, it is important for businesses to obtain the right information about the customer from the start; making sure it knows exactly where any factories and warehouses are located.
It can be tempting for small businesses to cut corners when it comes to debt management but this can make matters worse. When chasing payment, it is important to follow debt management protocols. However, sometimes managers overlook such matters, which can make it harder for them to recover bad debt through the county court system. To avoid this, businesses should seek professional advice before proceeding. Having access to good quality advice could also prevent the business from doggedly pursuing a claim that it has little chance of winning or where it would be unlikely to recover its full value.
In most cases, for claims of less than £10,000, it is possible to make use of the small claims court system. Using this system, businesses can claim back court fees and a set amount allowed for issuing the claim, but they are unlikely to recover the full value of the claim. Depending on the values involved, businesses may need to be prepared to write off some or part of the claim or else try to settle the claim out of court.
For businesses focused on growth, it is important to establish the right policies and procedures from the start and this should help to streamline debt management. Using specialist debt recovery services can help the business to manage debt more efficiently, while freeing up managers to focus on what they do best; creating new trading relationships and winning new business.
Alan Hamblett is a partner and debt recovery specialist at Shakespeare Martineau.