Late payments can severely disrupt a business’s operations, and can even lead to insolvency. An effective debt recovery policy is a must
Late payment of invoices, especially to SMEs (which account for 61% of UK employment), is a major issue in this country. Research by the Federation of Small Businesses published in 2023 showed that 52% of small businesses experienced late payment, with 25% reporting an increase in late payment in the previous 3 months. The FSB also found that if late payments had been made on time, when compared with other countries, up to 50,000 business closures could be avoided each year.
In addition, research published by NatWest Group in December 2023 showed that:
- 27% of SMEs in the UK are owed between £5,000 and £20,000 in unpaid invoices
- 55% said the number of late payments increased over the course of 2023
- 31% said they spent between 21-30 hours per month chasing payments
- 36% of payments taken in any given month are late.
- Cash flow issues caused by late payments was stated as being the most pressing late payment issue by 44% of businesses.
Numbers like these show that late payments can severely disrupt a business’s operations, and can even lead to insolvency, meaning that an effective debt recovery policy is a must. We are grateful to debt recovery consultant Mike Hartley, who works with our Thames Valley offices, for these 10 tips that all companies should consider.
- Know your customer. When extending credit to a new customer, or when an existing customer says that they are “changing names”, do your homework. Make sure that the customer is who they say they are. Double-check names, phone numbers, physical and email addresses. The rise of “spoof” companies during the pandemic is a real problem; and failing to carry out due diligence can result in huge losses.
- Consider Personal Guarantees. If you’re dealing with a newly incorporated limited company, consider asking for a personal guarantee from its director/s. This should offer you some further protection, even if you just insist on it for the first 12 months of trading, whilst you form a relationship.
- Invest in technology/software. Would you know if one of your biggest customers started experiencing financial distress? A relatively inexpensive subscription to a credit agency will ensure that you’re constantly monitoring your customers financial standing and are immediately aware of any adverse activity such as CCJ’s or potential insolvency.
- Check your terms and conditions. If you have any, when were they last updated? Are they still relevant to your business and the relationships with your customers? Importantly, and especially if you’ve used “off the shelf” T’s & C’s, do they preclude you from taking the action you need to take? Do they actually tie your hands behind your back when it comes to debt recovery? Having your terms and conditions checked by a professional is important and shouldn’t be overlooked.
- Use legislation. Many firms do not routinely rely upon the Late Payment of Commercial Debts (Interest) Act 1998, despite it having been incepted so long ago. It gives you the statutory right to charge compensation and a set rate of interest against unpaid commercial debts (i.e. debts that arise between two commercial entities or parties acting on a commercial basis). Despite this, many firms still do not use the Act routinely. Incorporate it into your terms and conditions if you can.
- Stay in touch. I find that many issues often have a communication breakdown at the heart of the problem. By constantly reaching out to your customers and being approachable, they are more likely to want to tell you if they’re in trouble. This gives you the opportunity to get ahead of the game and try to find a workable solution.
- Act fast. If a customer account starts falling into arrears, don’t ignore the problem. You stand a much better chance of recovering what you’re owed if you act quickly and initiate action. The longer you wait, the less likely you are to get paid what you’re owed (certainly in the current climate!).
- Use professionals. You’re the expert in your area of business; but that doesn’t mean you’re an expert in debt recovery. I’ve seen so many SME owners lose a case or have to write off a claim/debt simply because they’ve taken an unintentional wrong turn when trying to collect debts themselves. It’s not cheaper to “do it yourself” if you do it wrong! This is much more important in the current legal landscape, where insolvency and debt recovery legislation is ever-changing as a result of Government intervention to limit the economic impact of the Covid-19 pandemic on otherwise-solvent businesses.
- Do your research. If you decide to outsource debt recovery, then speak to other business contacts and find out who they use or would recommend. Don’t immediately go for the cheapest option, as it might cost you more in the long run. Ask questions and be cautious if the answers are vague. Find out if they cover “disbursements” such as Court Fees etc… If they don’t, then what looks like a cheap deal at the outset can become expensive. Be very wary of debt collectors who want an upfront fee of any kind.
- Watch your own finances. Don’t let bad debts creep up on you, as they can be the downfall of your own business. If you think that bad debt may affect your ability to trade, either in the short or medium term, seek advice early. Robust credit control processes together with professional advice and a clear strategy may well avoid future problems.
Contact us for help and advice with Insolvency
Mike points out that these are just some of the general key points about debt recovery that he regularly focuses on with his clients. Acting fast is perhaps the most important of them all and the same applies to when businesses are in financial difficulties and facing insolvency. The sooner advice is sought from an Insolvency Practitioner the more options are available to turn things around and avoid a formal insolvency procedure such as a Creditors Voluntary Liquidation.
If you need our help and advice in any of our specialist insolvency areas, or need the help of a debt recovery expert like Mike, please contact us or call any of our offices, below, for a FREE initial discussion on the ‘phone or over a coffee.
