- Young businesses need cash and good credit control is an essential management tool. Try and get payments in advance, letters of credit or cash on delivery but if you must give credit to customers here is some advice.
- Get your customers to pay on time by talking to the regularly and building a good relationship.
- Make sure you have an agreement on how long the credit period will last and how payment will be made. The agreement can be verbal but it should preferably be in writing. Where there is neither an agreement in place nor industry custom and practice the law sets a default period of 30 days.
- Use the method called BEBO this means bill early and bill often – do not let things drift.
Charging interest on late payments
- If some customers still end up paying late you have rights under the late payment legislation to charge interest and debt recovery costs.
- Purchasers cannot contract out of the late payment legislation – ie they cannot deny the supplier their statutory right to, for example, charge statutory interest.
- If you indicate in your terms and conditions that you will charge interest on all late payments, it is up to you whether you actually do so or not. You should address each debt on a case-by-case basis.
- With persistent offenders, you may need to start charging interest to act as a deterrent in the future.
- Make sure invoices include an agreed payment date so customers know when interest will start being charged – let customers know if interest starts to accumulate.
- Before charging interest, you could issue a letter stating that the payment is late and if it is not paid within, say, seven days, interest will be charged.
- Present the customer with a final receipt once the interest and the original sum have been paid, outlining details of interest charged.
- As well as charging interest you can also claim costs for the recovery of late payments.
The costs, which are fixed, are as follows:
Amount of the debt – Debt recovery cost you can charge
- Up to £999.99 – £40
- £1,000 – £9,999.99 – £70
- £10,000 or more – £100
However, before applying the charge, you should consider the relationship with the customer find out the general industry practice.
Taking further action to collect debts
- Before you take court action, you should consider the alternative methods of recovering debt, negotiation, mediation, conciliation or arbitration.
- You should continue trying to recover the debt using the usual methods, eg telephoning the debtor to remind them that the payment is now overdue. Another alternative is to use a debt collection agency or send a solicitors letter.
- The advantages of using an agency are they have the time, expertise and resources needed for the job. It can be a fast method of recovering debts so will save you time.
- The disadvantages are that an agency can be costly – the commission on the money recovered is typically 8 to 10 per cent for commercial debts, you may lose the customer and if the agency is heavy-handed, your reputation may be damaged
- A further alternative is for you or your debt collection agency or solicitor to issue a statutory demand, promising an application to court for the formal winding up of the customer’s business if payment is not made within 21 days.
Taking court action to collect debts
- Taking legal action to recover your money should be a last resort.
- If court action still seems the best solution, consider whether making a claim is cost-effective. It might be cheaper to write off small sums. If a customer is likely to place large orders in future, it may be better to let things lie if only a relatively minor amount is in dispute.
- If you decide to take court action, make sure you have resolved any disputes over the goods or services you have provided. If you don’t do this, the debt will be difficult to recover. You also need to make sure that customers have the means to settle. If they are bankrupt or in liquidation, your debt is probably irrecoverable.
- Debts of up to £5,000
- Debts of up to £5,000 are dealt with by the small claims track at your local county court. This offers a quick and inexpensive way of making claims for unpaid debts, as you don’t have to employ a solicitor.
- In Scotland, claims are dealt with by the Sheriff Court.
Debts over £5,000
Claims from £5,000 to £25,000 must be issued in a county court, while claims of more than £25,000 can be issued in the High Court. It’s advisable to get legal advice about this.