The last two years have been diabolical. First governments, businesses and the public fought to subdue COVID-19. Then supply-chain constraints and rising demand combined to stoke inflation to increase the price of raw materials and goods exponentially. Now we have war in Ukraine and who knows how that’ll eventually play out.
All in all, businesses are facing unpredictable risk that involves customers struggling to pay. Good credit control and debt recovery processes have never been so important, especially for practices that undertake commercial rather than “retail” work.
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 Businesses (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 Gemma: “The campaign group Good Business Pays has previously reported ‘worsening of payment practices’ and, as government has wound down its COVID-related support measures for businesses, it is inevitable that more companies will start to experience debt collection issues.” She further 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 county court judgements (CCJs) indicating a more robust approach to debt collection.”
As government has wound down its COVID-related support measures for businesses, it is inevitable that more companies will start to experience debt collection issues
Laura Charles, head of debt recovery at Else Solicitors, 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 people look at their debtors, when perhaps before it was not top of their list.”
She also thinks that over the last five years “debtors have 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.
Just because you are dealing with a large company [do not assume] that it is any more credit worthy than an individual or small company… Many large organisations take advantage of small suppliers by imposing unreasonably extended payment terms
Gemma warns practices 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. As the FSB points out, many large organisations take advantage of small suppliers by imposing unreasonably extended payment terms; 120 days is not unusual.”
Charging interest and late payments
Another option for Gemma is charging interest on late payments which, she says, “is not only fair but sends a signal to the late payer that you take your terms seriously”. Notably a number of practices already do this – Tyndale Farm Veterinary Practice, Woodcroft Referrals and Uplands Way Veterinary Clinics all claim a right to charge interest on unpaid debts.
Next, practices need to implement good credit control hygiene which means identifying, and dealing with, bad debts. This means engaging with those apparently unable to pay.
Consider a clause which stipulates that “if one invoice falls due, all invoices are immediately payable”, especially if practices intend to pursue, so they do not have to wait for all other invoices to become overdue
Laura has similar views and builds on what Gemma recommends. She asks 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. Laura 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”.
Laura 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, she says to consider a clause which stipulates that “if one invoice falls due, all invoices are immediately payable”, especially if practices intend to pursue, so they do not have to wait for all other invoices to become overdue.
Credit checks and searches
As to what good credit control looks like, Gemma says that common sense should rule – practices 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 – where goods have been supplied – 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 Laura, “clear rules on how to deal with different types of customers, how to advance credit or not and whether they should be reviewed on a monthly basis”. Seeking personal guarantees from directors of customer firms could also be considered.
In practical terms, practices need to take steps to make sure invoices meet any specific requirements a customer may have, such as the inclusion of a purchase order number. They should also feature the date on which payment is expected along with bank details and any other payment options, if offered. Similarly, paper invoices should not be sent if online submission is required.
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
Something else Gemma considers essential is 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.
But if stress becomes apparent Gemma’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 think about, reckons Laura, is obtaining copies of the identity of individuals, directors, partners, etc. She says, “carry out a credit check on that individual, if you have such a facility, through organisations like Experian or TransUnion. 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.”
Laura also suggests a search on the Insolvency Register to see whether a person is bankrupt or in an individual voluntary arrangement (IVA) – or has been. Similarly, practices 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. 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 what to do.
By talking 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
Here, Gemma thinks that good communication can often resolve a situation: “By talking 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.” Regular reminders of the outstanding debt can also produce results.
Something else Gemma mentions is understanding who is responsible for paying invoices and their payment processes and cycle. She also recommends keeping notes in case the matter goes legal.
But if a problem does arise, Laura advises 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, which was alluded to earlier, that there is legislation – the Late Payment of Commercial Debts (Interest) Act 1998. 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 practices 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.
There are several reasons why an external agency might be the answer. As Gemma 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”.
There is nothing to stop a practice pursuing a debt, regardless of size, itself. However, again, it may be more efficient and cost-effective to use a specialist debt agency
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”.
There is nothing to stop a practice 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 (LBA or a letter of claim) to, as Gemma 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. Gemma adds that “if the debt is disputed, and the debtor defends the claim, you may be able to use an independent mediator to help negotiate an agreement, undertake binding arbitration or, alternatively, you will have to go to court”.
Going to court should be a last resort and if a practice decides to opt for court, it needs to be sure the debtor has the money to pay as pursuing a penniless debtor could end up being a very expensive exercise.
The matter of debt is perennial and unceasing. But as Laura says, the sooner a practice acts, the better. It’s important to not open a ledger up to risk. This means installing a robust credit control process and keeping a good solicitor or a debt recovery agent on the books.