Credit Control and Debt Recovery
For many modern businesses, setting payment terms can be thorny issue, and in the current climate, it is crucial to ensure that your debt recovery process runs smoothly and follows regulations to ensure your cash flow is where it should be but to retain your customers too. There are a host of methods to try to get your clients to pay on time, but unfortunately it is a fact that some customers simply always pay late. You do have certain rights under current legislation to use your discretion in charging interest and costs in late payment, but there are other ways of managing the situation and trying to prevent problems arising to start with. Making your payment policy as clear as possible at the point of sale is a good start, and prepayment terms on an initial contract may be helpful in establishing trust if you prefer not check a customer’s credit rating.
When you agree to provide a product or service for a client, you can arrange credit terms according to any time limit you want, and this agreement can be both written and verbal, although clearly a written agreement is preferable in terms of enforceability. In most industries there are standard customs which tend to suggest a payment schedule – be it 14 or 30 day invoicing, or payment at the end of the month of invoicing. This period starts either on the date of delivery of said goods or services, or the date that the customer receives notice of the outstanding amount; whichever is later.
The first steps in debt recovery are simple, i.e. calling to remind the customer the amount is due, or sending overdue invoices. A solicitor or debt collection agency can be helpful in cases where the payment terms are broken, although of course you can begin this part of the recovery process in house. If you choose to use a recovery service, check their credentials thoroughly. Agree a percentage which you feel is worth paying to recover losses, and perhaps agree a set fee with them in advance; make sure you know their reputation and success rates. They may charge a fair amount, but you need to ensure they are a professional organization who will not damage your credibility for customers you wish to return to. Check if they are registered with the CSA (Credit Services Association) and by all means go with recommendations from fellow business owners. Consulting a good accountant is a great idea as they will likely be able to offer the best advice on successful agencies, and may be able to recommend some other ideas you hadn’t yet thought of.
Charging interest is an option, but do bear in mind that each case must be considered on it’s own merit, and that it may way well have a detrimental affect on future relationships with clients if they really have a genuine cash flow problem and are not persistent late payers. The rate that you use to calculate the interest is called a reference rate and is fixed for a 6 month period each time. The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year. The rate in force on 30 June is used from 1 July to 31 December. You can calculate the interest payable on overdue bills by taking the relevant reference rate and adding 8 per cent. If you prefer, you can set a contractual rate either above or below this; therefore the statutory rate will not apply.
Claiming costs on late payments is also a possibility, although again it is worth bearing in mind that this method can be rather aggressive and not very conducive to good customer relations. There are set legislated conditions on charging these costs which are:
£40 on debts on up to £999.99
£70 on debts of up to £9,999.99 and
£100 on debts of over £10,000
If you intend to follow this route, you must inform the customer in writing, apply and send a new invoice showing the charge and the new outstanding total.
If none of the above works, you do have the option of taking court action. This probably isn’t applicable for smaller amounts where the cost involved outweighs what you may recover, or where the customer is valued enough to allow a write off situation to occur. If you are set on court action, the first thing to do is ensure that the late payment is not as a result of any dispute or issue with the goods or services provided. It also makes sense to ensure the debtor is able to pay, and not in liquidation which would make the debt impossible to recover anyway. For small claims of under £5,000, you will deal with the small claims track of your local county court, and you do not require a solicitor. For amounts over this figure and up to £25,000, claims have to be issued in a county court, and sums over £25,000 can be issued in the High Court – for figures of this level, a good solicitor is vital.
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