Commercial debt recovery has come under increasing scrutiny during 2020 and into 2021, as the effects of the pandemic have been felt and cashflow has become an issue for many businesses. As well as having effective documentation and clear payment terms in place, having an understanding of what your options are if a client or customer refuses to pay you are very important.
The first thing you need to consider is how robust your own debt recovery procedures are? Do you have anyone in house who has a specific role aim tied into credit control and debt recovery? Do you have a sales team? Have they had training to be aware of what the challenges are for credit control and how they can help avoid debts from new clients. Is there a sense of understanding and “mission” between everyone involved in the business?
If you have a credit control team in place, you should also have a routine system in place to tackle all facets of credit control. This approach needs to be understood across the whole business, so new clients are being checked in detail for their ability to pay from the “onboarding” process, right through the day to day interactions with the client through to the payment process.
This system must be able to monitor what is happening and react to late or non-payment as quickly and effectively as possible. Clients who have not paid should be contacted and followed up if there is no response to usual enquiries, with a letter, an email and a phone call. Making contact can help remind customers to pay on time, help maintain a good working relationship and avoid you having to perpetually chase debt.
Encourage clients to pay via electronic transfer or BACS if at all possible. This cuts down on paperwork and also provides less hiding places for errant clients, i.e. “the cheque is in the post…” type of excuse.
If you are not making the progress you need to with non-payers, you should be prepared to act quickly and show your intention to the client that you are serious about debt recovery. Do double check with your credit control team that payment hasn’t been received whilst you are proceeding with your debt control procedures. This can avoid serious embarrassment and a terse response from an annoyed client.
If a client persistently pays you late it may be partially down to your own behaviour. If your business tolerates clients paying late without doing anything about it, then your clients will assume that their behaviour is fine and will carry on doing it. State your acceptable parameters clearly and politely correct persistent late payers.
Throughout the recovery process you should always be polite, professional and persistent. The three ‘P’s’ are vital to successful credit control. One golden rule is if you say you are going to do something, then do it! Empty threats get noticed and future “letters before action” etc will be ignored!
Even with the best planning and active credit control procedures, some clients may still pay late. As well as actively chasing debt payments you should check on any potentially damaging impacts on the cashflow of the business. A cashflow forecast and monitoring programme can help identify problematic payments and flag up wider problems before you get to a crisis point.
Dealing with late payments is an area that most businesses will have to deal with sooner or later. Consistency and awareness are key to having a good system in place. Do not ignore an issue and hope it gets better. It hardly ever does. These are some measures you can follow:
- Check what you have sent out is correct. Has the client queried something? Did the invoice get sent to the right person and right place?
- Your payment terms in your paperwork (contracts etc) should be explicit. You should state that you will exercise your statutory right to claim interest (at eight percent over the Bank of England base rate), and compensation for the debt recovery costs under late payment legislation.
- You should also advise them that you will be taking further action if necessary by means of a Letter Before Action (LBA), which is often enough to prompt payment. If you use a specialist solicitor to send the LBA it can focus minds very effectively!
- If your client fails to pay, stop supplying whatever it is you supply them with (check the terms in your contract with them before you do this). If your product or service is important to the party who owes you money it helps add some leverage.
- Be realistic. If your client is insolvent or has no funds, spending money on legal recovery methods is just wasting more of your money.
Legal action is an option if all other attempts at recovering what you are owed has failed. Take advice from a good firm of debt recovery solicitors. They will be realistic about your chances of recovery once they understand the facts and have looked at the status of the party who owe you money.
A summary of commercial debt recovery options
The first move is usually to send a late payment reminder letter to the client, requesting that they pay as soon as possible. The courts will usually expect to see evidence that all avenues to recover the debt have been made before stronger legal options are considered. You may wish to follow up your initial letter with a final letter from your business requesting payment within seven days.
If you do not receive a response or payment, you should instruct a commercial debt recovery solicitor to send a “Letter Before Action” to the client notifying them of an intention to issue Court proceedings to recover the outstanding sum. This will maximise your prospects of recovering your legal costs as well as the debt. How you take action at this stage is governed by strict procedures, so unless you are very familiar with those rules, it is a good idea to instruct a solicitor.
If you have still not received payment, your solicitors will explain the options open to you that involve court action or insolvency proceedings.
How court action works
A claim can be issued at court against a commercial debtor. A claim form is completed that includes the details of the claim and a breakdown of the debt. These documents are filed at court alongside the fee that is due.
The court will serve the claim on the debtor. The debtor is required to acknowledge the claim within 14 days and respond within 28 days. The debtor can admit the whole of the claim, but if they do not admit the debt, then a defence must be filed. A this point the debtor can make a counterclaim. The claim is then allocated to the appropriate track according to the size of the debt and responses. If the debt is under £10,000 it is usually allocated to a small claims track.
How insolvency proceedings work
If a commercial debtor is unable/unwilling to pay a debt of more than £750, you can petition the court for a winding-up order. This tactic is often highly effective in recovering debts, as businesses obviously want to avoid insolvency.
For individual debtors, if the debt is more than £5,000, a bankruptcy petition to the Court is possible. If a bankruptcy order is made, the debtor’s assets can be taken to pay their debts.
When a debtor still does not respond:
If the debtor fails to respond to a Court claim and judgment is entered against them or they fail to make a payment, a business may take enforcement action. There are other options available that include:
- execution against goods owned by the judgment debtor.
- an attachment of earnings order.
- a charging order over a property owned by the debtor.
If you have a commercial debt that needs recovering, speak to rhw’s commercial debt recovery team and get back what you are owed.