Debt Collection guide for small businesses
Are your clients late in paying you each month & hold back making payment for as long as possible? Or Do they not even bother to pay you at all? Recent research has proven that this can create serious cash-flow problems for small business owners. This blog will give you some advice and also hints and tips to hopefully overcome this issue.
Let the Judge Decide?
Do you rush straight to court or not?
It’s been reported that more and more British businesses are moving towards legal proceedings against their late paying clients, sooner rather than later. Whilst court action is an effective way of recovering unpaid debts, it can be expensive if the debtor does not pay and a solicitor will usually not carry out any back ground checks on the company or the individual if you are dealing with a sole trader to let you know if they have any sizeable assets, have been taken to court in the past, if there are any outstanding charges registered against the company and if they are in the process of going into liquidation or signing a formal agreement to deal with their debts like a CVA, IVA, Administration, Trust Deed or Bankruptcy. All of these are important factors to consider before taking the plunge and raising a court action, we think this should be used as a last resort, rather than the first port of call, as it will also break all relationships you had with that client.
We do think a bold approach is key to a small businesses survival, Late Payments are having deeper consequences than many people realise. Recent research found that 6% of small businesses had to make at least one employee redundant last year as a direct consequence of late payment, and one in 20 were also forced to reduce staff working hours and shifts due to their clients failure to pay on time.
Dangle the Carrot?
If your client is late in paying you we would always recommend that you ask for payment in full, however this is sometimes not always possible if your client simply does not have the funds. Instead you could offer them a repayment plan where you would get your money back by instalments, some money is always better than none. Always get a copy of the repayment schedule agreed in writing, email or letter is fine, this way if it’s defaulted on it can be used as evidence to prove the debt is not disputed and also that your client has defaulted on the agreement and is failing in their ability to repay their debts as they all due. You can also notify them in writing that their debt has reached an unsustainable level and you will no longer be able to provide goods and services unless they agree to the repayment plan. If your clients have some money, they will probably pay you using this method, you will have avoided damaging your relationship with them, and they will think you are doing them a favour so hopefully it will be smiles all-round!
Turn up the heat?
When you think your efforts have failed and you are starting to doubt that you will ever see your money again, it’s time for a more assertive approach. Many businesses large or small will enlist the services of a Debt Collection Agency like ourselves. A word of warning, there are many rouges in our industry, you should go with a well-established, reputable firm who are members of Regulatory bodies like The Credit Services Association & The Institute of Credit Management. They should also not take any upfront fees from you and work on a No Collection – No Fee basis.
The debt collection agency will serve demands and apply pressure on your client’s using debt recovery methods such as, telephone calls, emails, face to face visits. This is often enough for your client to pay up and as they are working on a no collection no fee basis then you are not going to be left with a legal bill to pay if they do not recover anything for you.
It’s really important that the debt collection agency understands the relationship you have had with your client as if we can establish this in our first demand letter that is served then it can increase our chances of making a recovery without the need for any further action. In some cases a custom built letter crafted to that particular client, not a standard template can give your client the nudge that was needed and can preserve the relationship with that client.
Bring the action?
If all of this has not worked then it’s time to consider issuing legal proceedings against your client, before accepting your application the court will expect you to have made a reasonable effort to come to an agreement with your client. You can use a solicitor or some debt collection agencies such as Debt Collect UK can issue your legal proceedings on your behalf. The Government’s Money Claim Online Service www.moneyclaim.gov.uk makes the process easy and can eliminate the need to use a solicitor so the cost can be limited to just the court fee, if you are in England or Wales. The legal process in Scotland and Northern Ireland is slightly different and we would recommend you visit www.scotcourts.gov.uk for Scottish actions or www.courtsni.gov.uk for actions in Northern Ireland if you wish to raise them yourself.
Raising Legal Proceedings can be complex and in most instances we would recommend that you use the services of a solicitor who is experienced in Debt Collection, or an experienced reputable Debt Collection Agency who can pass this to a solicitor on your behalf so that your case is watertight with no errors before being submitted to court.
Defendants in England & Wales are required to state if they have any reasons for non-payment within 14 days of the claim or they will face a County Court Judgement. Again the process in Northern Ireland & Scotland is slightly different and the timescales to respond depend on the amount of the debt owed. You will have to go to a court hearing or if you have a solicitor they maybe able to go on your behalf if the debtor denies or disputes owing you the money. Please be warned, defended actions can be very expensive, so if you have an inkling the action is going to be defended you should consider the size of the debt and if it is going to be worth your while pursuing, as once you start the legal process it can be difficult to stop it. If they admit owing the money, or don’t respond you can get the court to order them to pay. If they still don’t pay you will need to have the court action enforced. You can use Bailiffs or High Court Enforcement Officers in England, Wales or Northern Ireland or Sheriff Officers in you are in Scotland.
Hurt in the pocket
It takes time and money to chase outstanding debts, and many businesses end up writing off small debts below £500.00 as they are simply not worth pursuing. They may look to learn from their mistakes and tighten up their credit control procedures to prevent this happening again. You should always consider the size of the debt and your chances of recovery, before instructing any action.
No one wants to suffer in silence
The stress of tight cash flow on small business owners is horrendous and no one likes the thought of having to undertake debt recovery measures against their clients, but why suffer in silence and put your own business and employee’s livelihoods at risk when you have so many other options that you could use to recover your bad debts?