production management
Credit control is key for any business regardless of economic conditions; but when the outlook is
uncertain, acting quickly can prevent unpaid bills becoming bad debts. Ben Hopps reviews guidelines
on debt collection - essentially a combination of established techniques and tricks of the trade.
Collecting debts in
a tight market
THE first thing to do is to follow up
on any debt as soon as it is not paid on
its due date. As you do this, look for
changes in payment patterns - eg if the
debtor is taking longer to pay than
they did previously. Beware extending
credit beyond a level you are
comfortable with; and if it is feasible
for your business, make credit checks
on the customer and take up references
and see if these are genuine. Whatever
you do, telephone the debtor; don’t
simply send out reminders. People are
more likely to pay and less likely to
come up with excuses for not paying
when they are being hassled on the
telephone. You will also get a better
idea of whether you are likely to get
paid, whether the debtor is genuine,
whether they might be in trouble, or
whether they are looking to avoid
payment.
Further Action
You are entitled to charge interest on
outstanding amounts. Your standard
terms of business should provide for
interest to be payable on late payment.
This must not be so high as to be
considered to be a penalty rate of
interest, but if you stick to around 8 %
this should be fine. You can also claim
compensation and interest under the
late payment of Commercial Debts
(Interest) Act 1998. Under this Act, all
business owners and managers can
claim reasonable debt recovery costs
and following an amendment in 2002,
can benefit from the simplification of
the calculation of statutory interest.
Additionally small and medium sized
enterprises can ask a representative
body to challenge grossly unfair
contract terms used by their customers
which do not provide a substantial
remedy for late payment of
commercial debts.
The compensation you may be
entitled to varies in accordance with
the size of the debt: a debt under £1000
attracts compensation of £40, between
£1,000 and £9,999, £70 and £10,000
and over, £100. The interest you can
legitimately claim varies depending on
when the debt was first incurred but
can be as much as 13.5% from the date
the payment fell due to when it is paid.
It can be difficult to charge interest in
practice, but sometimes you need to use
whatever weapon you can to put
pressure on the debtor.
You should also consider a 7 day
letter. You can send a letter threatening
to issue court proceedings if the debtor
does not pay, typically, within seven
days. To be more effective, this would
need to come from a solicitor but you
are then starting to incur additional
costs. Even then, whilst this is a step
worth taking, it will probably not
carry the weight of sending a specimen
court claim form or a serving a
statutory demand. You can download a
specimen court claim form from
www.hmcourts-service.gov.uk. This is
fairly simple to complete. You can then
write to the debtor attaching a copy of
the draft claim form saying that you
are ready to issue proceedings and will
do so unless payment is made
immediately. You will need to consider
whether you will issue a claim if your
bluff is called, but this can be very
effective. A word of caution: you need
to be very careful that you make it clear
that a claim has not been issued, and
16 MWP november 2008
that the form is simply in draft,
otherwise misrepresenting that this is
some official court paper could get you
into trouble.
One of the most effective methods of
putting pressure on a debtor who has
the money to pay you but chooses to put
you lower down the list of priorities is
to serve a statutory demand. The debt
must be for £750 or more. These
demands are effectively a warning that
unless the debtor pays within 21 days
you will take bankruptcy or liquidation
proceedings against them. There are
different forms, depending on whether
the debtor is an individual, a partner or
sole trader, or whether the debtor is a
company. You can download the
relevant forms from
www.insolvency.gov.uk. There are some
formalities to be complied with and the
form should be dated and signed. For a
company, the form should be sent to the
registered office - this can be checked
on the Companies House website
www.companieshouse.gov.uk, and it is
suggested that a copy is also sent to the
trading address, if different. For an
individual, strictly speaking, the
demand should be served personally,
but initially you may simply want to
post it to them as a practical and
cheaper option. Please bear in mind
that this is higher risk strategy and you
must be absolutely certain that the debt
is due and that the debtor has no
grounds to dispute it. If the debtor
disputes the debt, they can apply to the
Court for it to be set aside, which could
involve you in having to pay their costs.
If you are satisfied that the debt is
undoubtedly due, this is a highly
effective tactic.
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