11th January 2016
Sarah Everton, dispute resolution lawyer at Myers & Co Solicitors in Burslem, Stoke-on-Trent highlights the ten most common mistakes business owners make when it comes to tackling debtors, and advises on the best course of action.
When a company provides goods or services before receiving payment, it is essentially the same as handing over cash. For this reason it is vital for cash flow and ultimately the survival of your businesses to be able to predict when you are likely to get paid and the cost of ensuring that this happens. This begins with having a credit policy.
By gathering the same types of information from each customer, it is possible to attribute different risk levels to each and adjust your payment terms accordingly. Your credit policy provides uniformity of terms for each type of customer you have and ensures compliance with regulations. Without a credit policy you are at risk not only of losing money, but also of breaching consumer protection regulations. If you treat some consumers more favourably than others without proper rationale, you could even fall foul of discrimination legislation.
Before you enter into any new business relationship, it is highly advisable to undertake ‘due diligence’ at the outset. This means you should try to gain as much knowledge as possible about your new customer’s ability to pay as is reasonable, depending on the size of the transaction. If dealing with consumers, it is also advisable to gather information relating to their employment status, their home ownership status, other financial commitments and whether they have had county court judgments or issues with debt repayments in the past. This can be done by carrying out a credit check.
While it is of course vital to the survival of the business to have a credit policy, which you send out with your terms of business at the start of your relationship with your customers, it is also very important to learn from experience. With time, you will begin to identify and profile the types of customers you have who are high risk and those who are low risk. You can then tailor the availability of credit to each type of customer accordingly. Some of your debtors may have genuine cashflow issues but otherwise be prompt payers, so it is important that this is taken into consideration.
Businesses should review their credit policies to ensure that they remain relevant and effective for their business. Businesses change, economies strengthen and weaken, and there can be differing demands on cash flow. If you do not adapt your policy having learned from mistakes you have made in the past, or tailor to the changing needs of your business, you could end up in serious financial difficulty.
Before you embark on a campaign to recover a debt from a customer, it is vital to evaluate the costs that you will incur in doing so. Obtaining a judgment in the county court may only be the start of the process. Enforcing a debt can also be costly so it is worth weighing up the likely expenditure against the size of the debts or you may end up losing even more money.
There are numerous regulations that businesses must adhere to when seeking to recover debts from consumers. Overly aggressive or persistent demands may also constitute criminal activity contrary to the Prevention of Harassment Act. As such in order to avoid penalties, you must ensure that your policy does not break the law.
A robust credit policy must also be structured; your debt recovery staff should be able to follow a procedure to ensure that your debtors are contacted consistently. If you demonstrate persistence, late payers will soon learn that they cannot just ignore the debt. Decide how long you will continue to contact them until they pay, and when you will pursue formal recovery proceedings.
Letters and emails can often be enough to get some debtors to pay, but some of your debtors may require a more personal approach. Telephone calls are an effective way of getting your debtor to provide information to you, and it is much harder to ignore someone when you are speaking directly to them. In other cases, reminders via text messages can also be effective but again this will depend on the profile of the debtor you are dealing with.
Out-of-date information about your customers can lead you to assess them as a lower risk than they may be, so it is worth making sure that you keep a record of their ability and willingness to pay on each occasion so that you are not caught out later on. If you do have to take court action, you will need their correct address and contact details for service of court documents.
In much the same way that consumer customers’ details need to be up to date, it is important to ensure that you are contracting with the right business. Companies can often have group subsidiaries, so it is vital that you have a binding contract with the right company, that this company has the means to pay, and that it is the correct company to pursue should payment not be forthcoming.
Each of your customers will have a different procedure for paying invoices. It may not be entirely straightforward, and may require the authorisation of several individuals before payment can be made. Therefore, it is important to know the names of the people responsible for this process so that you are not unnecessarily sending reminders or increasingly forceful demands at a time when payment is winding its way to your account, albeit slowly.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.