If 'cash is King', then it can be a 'right royal to do' on occasions to prise the crown from those in the realm that owe money.

In bygone years, debtors could go to prison or to the workhouse. These days however there appears to be little deterrent to those who choose to delay payments or not pay at all.

The late payment legislation provides businesses and the public sector with 4 entitlements:

· the right to claim interest for late payment;
· the right to claim reasonable debt recovery costs, unless the supplier has acted unreasonably;
· the right to challenge contractual terms that do not provide a substantial remedy against late payment;
· the right for "representative bodies" to challenge contractual terms that are grossly unfair on behalf of SMEs.

If no period of credit has been agreed then the default period is 30 days. There are also limits on the time after which it may not be possible to chase a debtor.

So what can a small business owner or sole trader do to reduce the risks of a debtor defaulting and if a default occurs how best can a business regain control over the debtor and the debt?

The following suggestions are designed to assist small business owners to avoid being in a position of having to pursue debtors and to recoup all or most of the outstanding debt within an acceptable time frame once a debtor defaults.

Readers will not be surprised to see the obvious nature of the proposed actions but nevertheless it may be a timely reminder to act as payments for work done is beginning to slow.

Warning signs that a business may be in trouble or may be about to default:

These fall into those that are obvious and those that are less so:

· an old one is the payment has been sent by cheque and it has crossed in the post"; other risk identifiers include;
· the payment deadline slips or is missed, leading to the necessity for a reminder
· the person responsible for the payment cannot be contacted or the person responsible for signing is away at the moment
· the invoice is re-requested
· there is always the 'problem with the computer'

Possibly less obvious to look out for is an unusually large order for a product or service where the business may be overstretching.

Prevention is better than cure.

To reduce the risks of being caught out by a debtor, establish systems and procedures such as:

· before agreeing to supply services, meet and get to know the client and find out about their business
· credit check the business or the individuals
· find out and meet the person who is going to pay the invoices and be clear about the systems that they use and when payment runs are made
· ensure that the terms of payment including payment intervals are clearly set out in an agreed and signed contract and understand the customer’s payment cycles
· keep in touch with the key people in the business who will be responsible for payment
· keep detailed records of contacts with all customers
· consider taking payment in stages or in advance
· don’t accept retentions
· never extend credit more than you are able or prepared to lose
· consider ‘factoring’ as an option if you have an extensive number of customers or large value contracts
· be clear and ensure that others in your business are clear about your policies and procedures in the event of a default
· at the outset of negotiations, ask for the mechanism by which payment will be made
· don’t be afraid to talk about money; it really is NOT a dirty subject

What to do if default looms

· contact the relevant person on the day that payment was anticipated; don’t delay. Use the telephone. The personal approach is much more likely to get a response (be pleasant!) than texts or e mails
· ask when / how payment will be made and follow this up
· record the conversation and if you have agreed a rescheduling of the payment send a statement with revised terms
· if there is to be a rescheduling it is preferable to meet with the debtor to ‘seal’ the agreement
· if the debtor has difficulties, while you may acknowledge these, remember it is your money
· explain realistically the process that you will follow in the event that payment is not received as agreed

If there is further default

· contact the debtor and meet (if possible)
· decide if this is likely to be a short term issue with a further rescheduling of payment terms
· decide whether the risk of alienating a customer is greater or less than the risk of non or partial payment and whether you wish to retain the customer
· determine the likelihood of receiving within a reasonable time period all or at least an ‘acceptable’ portion of the amount owed
· always keep in contact where possible with the debtor

What if all ‘reasonable approaches’ have failed?

Once you have determined that you are unlikely to receive payment:

· compile correspondence of all the steps agreed with the debtor and the actions or inactions arising and forward this to the person responsible keeping the door open for communication and payment
· give a ‘final’ period of notice for payment and offer the mechanisms by which payment can be made
· note your correspondence as a ‘pre-action’ letter and advise that you reserve the option for Court action to recover the debt and give a date by which this will take place if the debt is not paid
· note that any costs will be added to the debt
· familiarise yourself with ‘money Claims Online / Small Claims Court / any Trade or Professional associations that you belong to that can provide assistance / consider specialist debt collection services (check costs and benefits).

Finally

We live in an imperfect business world in which business owners inevitably come across those that deliberately or unintentionally drag their feet when it comes to payment and some that never intend to meet their commitments.

Never forget, it’s your money and time (equals money).

It’s hard enough earning and the longer it is in someone else’s account it is not paying your bills. So never be seen as a ‘soft touch’ when it comes down to getting what is rightfully yours.

Geoff Cooke
MBA, MA, BSc(Hons), Dip H Ed., CQSW, ACIPD
Director Krista HR Ltd

Coaching and training in these and further aspects of debtor management are available from Krista HR Ltd. Contact admin@kristacreative,oc,uk for a discussion.

Disclaimer.

The views expressed above are copyright of Krista HR ltd. Krista HR ltd offers no guarantees as to the accuracy of the content nor can take any responsibility for any consequences of action or inaction arising as a result of any person’s actions derived from this article.