The last three years have been diabolical. First governments, businesses and the public fought to control and subdue Covid-19. Then supply chain constraints and rising demand combined to stoke inflation and increase the price of raw materials and goods exponentially. Then there’s the war in Ukraine.
All in all, businesses are facing unpredictable risk that involves customers struggling to pay debts. Good credit control and debt recovery processes have never been so important.
The market changes
The need to be financially proactive is particularly important now, reckons Gemma Baker, partner and head of Debt Recovery at Wright Hassall. She’s seeing increased demand for debt collection and cites data from the Federation of Small Business (FSB) which reported in January (2022) that 33 percent of small firms were suffering from late payment which has affected the viability of 8 percent of them.
Covid has played a part in this says Baker: “As government winds down its Covid-related support measures for businesses, it is inevitable that more companies will start to experience debt collection issues.” She says that this is borne out by insolvency experts who are warning of an oncoming “debt storm” – “Begbies Traynor noted that almost 590,000 ‘UK businesses are reporting significant distress’ as demonstrated by the significant rise in CCJs indicating a more robust approach to debt collection.”
She’s seeing Covid related difficulties being quoted as the reason why many are experiencing late payments on a regular basis. She notes that “although most businesses are treating customers impacted by Covid with a good deal of forbearance when it comes to unpaid debts, others are struggling to obtain meaningful engagement from debtors regarding repayment.” And it’s this that is leading to more County Court proceedings.
Laura Charles, head of debt recovery at Else Solicitors, is seeing the same, but doesn’t blame Covid entirely. She says that “a lot of debts were incurred before March 2020. But perhaps having to tighten belts has made more look at their debtors when perhaps before it was not top of their list.” She says unpaid rent claims are often excused by firms saying that “they have not been paid by their debtors so they in turn cannot pay our client.”
She also thinks that over the last five years “debtors started to have more information and advice available to them on the internet and have become more aware of what can and cannot be asked of them.”
Minimise the risk
With the background established, it’s logical to look at risk management options.
Baker first. She warns firms not to assume that “just because you are dealing with a large company that it is any more creditworthy than an individual or small company. But as the FSB points out, many large organisations try and take advantage of small suppliers by imposing unreasonably extended payment terms; 120 days is not unusual.”
In fact, for Liz Barclay, the Small Business Commissioner (see panel), one of the most important things small businesses can do to help mitigate against payment challenges “is to be as thorough as possible when negotiating contracts and payment terms and preparing invoices.” She says to “be upfront about the payment terms you can and can’t accept. It may leave you without cash if you must wait 90 days to be paid, so you do need to be prepared to ask to be paid in a shorter period – 30 days is a good target.”
It’s for this reason that terms and conditions should state payment terms clearly and visibly, including the consequences of non-payment. Similarly, it should be clear that interest will be applied if payments are late.
On this Baker believes that “charging interest on late payments is not only fair but sends a signal to the late payer that you take your terms seriously.” By extension, firms need to implement good credit control hygiene which means identifying, and dealing with, bad debts.
And Charles has similar views and builds on what Baker and Barclay recommend by asking her clients to think about whether any administrative costs will be applied to late accounts and how costs for any third parties who get involved will be dealt with. She would also add in a period for the inspection of goods – “this should be provided to ensure there is a short period which will not upset the ability to pursue for payment”.
She also thinks terms should detail termination events which would cover “a customer who becomes insolvent or appears to become insolvent due to the continual late payment or non-payment of the invoice.” Further, Charles says to consider an ‘if one invoice falls due, all invoices are immediately payable’ clause – especially if firms intend to pursue so they do not have to wait for all other invoices to become overdue.
As to what good credit control looks like, Baker says that there are many sources of help including the Small Business Commissioner, the Federation of Small Businesses, banks, lawyers, accountants, or bookkeepers. In terms of taking credit control seriously – she says that “there are simple ways of keeping on top of it such as implementing a diary ‘bring forward’ system to remind you to follow up bad payers.”
Baker says that common-sense should rule – firms should never allow credit for an amount they cannot afford to lose. But if they must give credit for a large amount, she says to insist on ‘retention of title’ provisions or some other form of security as “this will give you priority as a creditor if your customer becomes bankrupt.”
Allied to this is the establishment of a credit policy with, says Charles, “clear rules on how to deal with different types of customers, how to advance credit or not and whether they should be reviewed on monthly basis.” She thinks that a good credit policy would reduce the risk of bad debt if it is followed across the company by all departments. Seeking personal guarantees from directors of customer firms could also be considered.
To these suggestions, Barclay adds more: “Take steps to make sure invoices meet any specific requirements a customer may have such as having a purchase order number on them. Put the date of the invoice and the date on which you expect to be paid at the top and make it easy to get paid with bank details and any other payment options if you use them.”
She also recommends avoiding submitting paper invoices if online submission is expected and remind customers of payment expectations in initial contract documents and use similar wording in final invoice paperwork.
Worryingly, firms – more likely sales departments – sometimes forget that no one ever got rich in selling to men of straw. This is why Baker considers it essential to carry out a credit check, using one of the established credit reference agencies, on both new and existing customers. She always asks a direct question of clients: “Even if you have been doing business with a particular customer for many years, have you ever checked their financial position?” The point is that what may have been a healthy business a few years ago may now be showing signs of stress – “and you need look no further than the high street for evidence of that.”
But if stress becomes apparent Baker’s advice is to “weigh up the likelihood of being paid and if in any doubt, do not proceed. Reward loyalty, but not at a cost to your business.”
Another element to consider, reckons Charles, is the obtaining copies of the identity of individuals, directors, partners etc. – “carry out a credit check on that individual if you have such a facility through organisations like Experian or Call Credit. A Land Registry search could also be carried out to see whether they are the owner of that property.” The importance of this cannot be overstated as “this will be useful at a later stage when you have obtained a judgment as you can place a charge over that property. You can also check Royal Mail to confirm the address provided is correct.”
Charles also suggests a search on the Insolvency Register to see whether a person is bankrupt or in an IVA – or has been. Similarly, firms can check on Companies House on the status of the companies they are dealing with.
Dealing with non-payment
Despite all reasonable efforts, payment problems will arise. And when this happens it is essential to have well-defined procedures in place so that when an overdue payment turns into a bad debt staff know exactly what to do.
From a practical perspective, Baker thinks that good communication can often resolve a situation: “By continuing to talk to your customer, you will prevent them from ignoring the problem in the hope that it will go away. You will also find out if there are serious problems behind the non-payment which may or may not be resolvable.” Regular reminders of the outstanding debt can also produce results.
Of course, to make contact means having complete records backed by processes that have been properly followed.
Something else Baker mentions – alongside making sure that bookkeeping is up to date and comprehensive – is that firms should send out invoices at the same time every month and in the same format – all while making sure that customers know procedures for chasing overdue payments. Doing anything else, Baker cautions, means that “you’ll end up essentially bankrolling your customers which is risky – unless you have deep pockets.”
She also advises understanding who is responsible for paying invoices and their payment processes and cycle. “Start a dialogue with them; if something goes wrong it is much easier to pick up the phone and try and resolve the situation in person. But keep a paper trail of all your communications with the customer: if you need to start legal proceedings this will provide valuable evidence.”
And Barclay doesn’t disagree. From her standpoint, firms should be ready to chase up a customer as soon as terms are reached. She notes that there are software options available to small business owners that can help streamline this checking and chasing process, but “personal relationships can also help… ask for a named contact in a customer organisation’s finance and payments team, and work with them if presented with a payment issue. Remember, the people responsible for paying invoices are rarely the same people who commission work.”
Fundamentally, holding the most up to date contact details is good practice even with long established customers. From Baker’s perspective, “if your customer information is not up to date, dealing with debt-related disputes can be difficult.”
But if a problem does arise, Charles advises talking in depth to the debtor and possibly suggesting a payment plan. She says, however, that “if they do not agree to a plan or do not stick to it, write requesting full payment and advise that if you are required to take legal action that this will only add costs to the debt.”
It is worth remembering that there is legislation – Late Payment of Commercial Debts (Interest) Act 1998 – that was enacted to deter companies from making late payments and to compensate creditors when commercial customers fail to pay their debts when due. Baker thinks that “the imposition of statutory interest is a useful mechanism when contractual terms may be silent on the issue of interest. The legislation currently allows interest of 8 percent plus the Bank of England base rate to be charged for business-to-business transactions.
Calling in backup
While there is much that firms can do themselves to recover monies, it’s nevertheless critical to debate whether this is something that should be managed in-house or whether it would be more efficient to outsource to an external service.
That said, there are several reasons why an external agency might be the answer. As Baker highlights, “a good agency knows how to act with discretion and will continue to nurture a good customer relationship; and it also knows how to deal effectively, and decisively, with those customers that are, quite frankly, taking advantage of you.”
She adds that a good debt recovery specialist will “uphold a client’s reputation, devise a bespoke strategy for recovering both single and bulk debts, and fine-tune its approach to take a firmer line with those customers who are persistently bad payers.”
As to the cost of pursuing an undefended debt, they are usually charged on a fixed fee scale. For instance, a claim of up to £10,000 may cost between £90 and £480 in addition to the payable court fees which increase in line with the debt amount owed.
“However,” as Baker warns, “if the debt is disputed, the cost will depend on variables such as the value of the claim, the number of witnesses, the complexity of the defence and the amount of documentation involved.”
There is nothing to stop a firm pursuing a debt, regardless of size, itself. However, again, it may be more efficient and cost-effective to use a specialist debt agency. They will probably issue a Letter Before Action (or a Letter of Claim) to, as Baker explains, “inform the debtor that you will take legal action if the debt is not settled.” She says that if this fails to produce the desired response an external debt recovery specialist can assist with enforcement to recover the debt such as winding up proceedings if the (undisputed) debt owed is over £750. Baker adds that “if the debt is disputed, and the debtor defends the claim, you may be able use an independent mediator to help negotiate an agreement, undertake binding arbitration or, alternatively, you will have to go to court.”
Baker warns that going to court should be a last resort and that “if you decide to opt for court, you also need to be sure the debtor has the money to pay you: pursuing a penniless debtor could end up being a very expensive exercise.”
Lastly, it should be remembered that Covid has introduced delays into the court system, primarily because of the backlog built up over the last 18 months, with some small claims taking up to a year to be resolved.
The matter of debt is perennial and unceasing. But as Charles says, the sooner a creditor acts the better.
It’s important to not open a ledger up to risk. This means installing a robust credit control process which keeping a good solicitor or a debt recovery agent as part of credit control process.
Small Business Commissioner – Liz Barclay
The Small Business Commissioner (OSBC) was set up under the Enterprise Act 2016 to address late and poor payment practices in the private sector. Under the legislation, large businesses must report how long they take to pay invoices so that small suppliers can decide if they are ‘safe’ to do business with. The OSBC helps small businesses – those with less than 50 staff – to resolve disputes with larger businesses over unpaid debts, as well as general advice on how to manage cashflow and be paid promptly.
As to why the OSBC can only help smaller firms, the commissioner, Liz Barclay, says that “it was the government’s decision at the time to offer the OSBC a set of powers to deal with the specific issue of late payment to small companies by their large customers.” She adds that in 2020 the Department for Business, Energy and Industrial Strategy consulted on possible future powers for the OSB, but “any change in legislation will be required for any amendments to be made to the OSBC’s current powers.”
So, is the SBC toothless? Possibly depending on the viewpoint. But as Barclay says, “ultimately, we can recommend a preferred course of action to companies involved in a payment dispute… [but] cannot compel parties to take those actions. However, the OSBC wields considerable power in the business community. Being named in a public report as a poor small business payer could have significant impact for a large company.” As a result, she says that the great majority of complaints investigated are resolved between parties, including through the brokering of structured payment plans.
To give an idea of the caseload, Barclay details that during 2020/21, the OSBC casework team dealt with 178 complaints. 38 were resolved informally, 40 taken on for more detailed investigation and 100 signposted to further support, advice, and guidance. On average, complaints were resolved in 17 working days, against a service level agreement target of 40 days.