Our debt recovery lawyers highlight the lessons from the past and provide a checklist to help protect your business now and in the future
For those of you whose business requires you to give credit or delayed payment terms on your sales no doubt like many others you are feeling more confident that the horrors of the recession are now behind us.
During the recession and beyond not only were businesses not giving credit (and if they were for less generous terms) but businesses were not actually seeking credit terms for fear of not being able to repay and thus endangering their business survival.
As confidence returns many, keen to see turnover figures improve, seem to have forgotten the very sensible routines and checks they had in place prior to and during the recession. However while the weaker businesses will have gone out of business during the recession there is always a marked increase in insolvencies after a recession ends. This delayed effect can catch out the over confident or unwary.
It is helpful to consider your processes on the basis that your customer will not pay. If they always pay within terms then you never have a problem. The following pointers will therefore hopefully be of value to your business.
Checklist to protect your business
- Do you know exactly who you are trading with?
Have you undertaken a simple and free Companies House check to see if they are actually a limited company and have not been or about to be struck off or are in liquidation already?
If they are an individual or firm/partnership do you know where they live so that if enforcement action is required you know where they are?
- Are you certain they trade from the location they say?
Simple identification checks and inexpensive credit reports should give you some comfort before you let thousands of pounds worth of product go off into the distance.
- Do you have a purchase order and a signed delivery note and are your terms properly incorporated into the contract?
If your terms are only on the invoice then they may not govern the contract because the contract was made when you accepted the order. Terms on an invoice are only seen by the other party after the contract has been made.
- Do your systems respond appropriately and resolve complaints quickly and fairly?
Whilst we all like to believe our product or service is perfect, sometimes that is not the case and we are now in a world much more ready to complain and delay payment. If you need to sue to recover payment, the courts will look at both parties' efforts to resolve matters without litigation and can sanction those who don’t by not allowing them to recover all their costs.
- Do you ask why they have moved to you?
Every new customer is either someone else’s old customer or a new business. If they are a new business then you should be more cautious in extending credit. If they are established, have they come to you now because your competitors stopped their credit because they didn’t pay? Some of you may even consider asking your competitor this question, so long as you are prepared to answer similar questions from them!
- Can your credit staff distinguish between “can’t pay and won’t pay?”.
Each circumstance needs to be handled differently. Often the “won't pay” will raise complaints that take time to resolve or just stone-wall with silence your efforts to get paid. The “can’t pay” tend to promise payment which doesn’t materialise or raise half hearted complaints. Both need to be monitored and strong action taken at the first available opportunity. If you have established your customer is in either camp there is no benefit to following your usual “dunning process” of chasers after the credit period has passed.
What is often overlooked by credit staff is that, if your business makes a profit of 20%, then a written off invoice of £1000 needs £5000 of additional sales to cover that loss in terms of product cost, running cost and that initial profit. It also represents no gain to your company but can lull you into a false sense of security based on these increased turnover figures. A bad debt for you can be more dangerous to you than ever it is to your customer.
So what happens if you are not get paid? Firstly things never improve with the passage of time –they will not pay later. Secondly credit staff often regard passing delinquent accounts out to a 3rd party as a failure on their part. It is not and their skills are in ensuring payments are made “in terms”. All too often those hard to collect accounts get left in favour of easier recoveries and are finally written off.
If you would like to discuss any of the issues raised or talk to us more generally about how we can help you please contact our specialist commercial debt recovery team.