Commercial debt recovery: 5 steps businesses should take
When you run a business you have a professional expectation that you will be paid by clients on time and in line with the payment terms specified on your invoice. However, this isn’t always the case. Unpaid debts can have a severe impact on the health of your business. Chasing debts is stressful, wastes your time and negatively affects your profits. Healthy cash flow is the lifeblood of your business and debt can leave you fearful for the future. Here we talk about how to manage and recover the debt to minimize the impact on your business.
1. Regularly analyse accounts receivable
It is important to analyse accounts receivable regularly to ascertain the current health of your business’s cash-flow so that if you need to take any action you can do so promptly.
Accounts receivable is the money that clients owe your business for the services or goods you have provided. Accountants include accounts receivable on your business’s balance sheet because it is money you expect to receive in the future. However, clients can default on payments and accountants allow for this. They call this portion ‘allowance for bad debts’. Accounts are analysed by considering points such as:
- Credit terms. Some clients may receive longer credit terms than others and so invoices may appear overdue when they are not.
- Billing date. Most companies send out invoices at the end of the month, so if accounts are analysed at the beginning of the month the receivables might appear unhealthier than they actually are.
- Unapplied credits. If credits are due to be applied against certain invoices this needs to be done before accounts are analysed.
- Any changes in the business’s credit policy. If there has been a change to your credit policy this could lead to a rise in bad debt levels or discrepancies in the accounts receivable.
- Changes to the business’s products or services. This could create differences in the trend of accounts receivable.
- The wider economy. Economic decline may mean bad debts are above historical average.
2. Set up a debt recovery process and make sure you stick to it
Before working with a client clearly agree payment terms. If a client’s terms differ from your own then you may need to negotiate, but always consider the health of your cash-flow. Make sure terms and conditions are agreed in writing, and that your debt recovery process is clearly explained.
Under the law, a payment is considered late 30 days after the client has received the invoice or you have delivered the goods or provided the service. Make it clear that in the event of late payment you will exercise your right to charge interest and reasonable debt recovery costs under the Late Payment of Commercial Debts Regulations 2002 and 2013.
Once you’ve sent an invoice to a client, make sure they have received it. Consider ringing slow-paying clients 10 days before the invoice is due as a reminder. When the invoice is a couple of days late, talk to the client to find out whether you can resolve any issues and remind them of the terms and conditions you both agreed. Follow up on your conversation with a letter.
3. Send a letter before action (or ‘letter before claim’)
You can only begin court proceedings once you have sent a formal ‘letter before action’ giving your debtor one last chance to make payment (even if you have already sent them a letter). In the letter, your lawyer will give limited companies 14 days to make a payment, and individuals and sole-traders 30 days. The letter may include a late payment fee which will vary depending upon the amount owed in accordance with the Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulations 2002 and 2013.
Before the deadline stated the letter is up, your lawyer will contact the debtor to again request payment or to negotiate a payment plan.
4. Consider litigation
If you have still not been paid you may consider taking legal action. Claims of up to £10,000 are processed by the Small Claims Court. It is important to make sure you have a case before you make a claim by ensuring you have followed procedures correctly, otherwise you could lose extra money through court fees – your legal expert will advise you. The Small Claims Court isn’t a court in itself but a process. The debtor will be ordered to pay the debt plus interest and costs within 14 days.
An alternative is to take insolvency action against a company or bankruptcy action against an individual. If you commence Winding Up Proceedings against a company or Bankruptcy Proceedings against an individual, you will go straight to the front of the queue for payment if there are other creditors. Before issuing proceedings your lawyer will send a Draft Winding Up Petition to a company or a Statutory Demand to an individual - most debts tend to be paid at this stage.
5. County Court Judgement (CCJ) and enforcement
When a debtor has failed to pay despite a court order, a CCJ allows enforcement action to be taken against them. CCJs are kept for six years and so, unless the debtor pays within one month, they will find it very difficult to obtain credit in the future.
Once a CCJ has been granted, High Court Enforcement Officers will visit the debtor to collect the amount owed to you plus their fees. They will request payment within 7 days, and if payment is still not made they will return to the debtor’s property to seize anything that could be sold to pay off the debt.
QualitySolicitors debt management and recovery services
QualitySolicitors offer a range of debt management and debt recovery services. We understand that action must be taken quickly to protect the future of your business. We provide efficient and cost-effective solutions that won’t place your business under extra financial pressure.
We help businesses to manage debt by putting practical plans in place to reduce financial risk, and we work strategically to ensure debts are recovered. Our aim is to achieve amicable collections first, but when this is not possible we can issue legal proceedings.
Contact our debt management and recovery lawyers on 08082747557 to find out more.
 GOV.UK, Late commercial payments: charging interest and debt recovery, https://www.gov.uk/late-commercial-payments-interest-debt-recovery/charging-interest-commercial-debt