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Debt Recovery - a Benefit or a Burden

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With the operation of modern business accepting that a great deal of customers satisfy invoices after the standard 30 day deadline it is not surprising that bad payers become bad debts very quickly. The problem most businesses face is how to ensure that a customer pays their bill without alienating the customer or incurring large debt recovery costs which may not be recovered. Over my years in legal practice I have come to the view that the best debt recovery system is based on compliance rather than force.

Compliance as with any other area of your business starts from within the organisation. I would strongly suggest that any business have sales agreements which set out how and when payment ought to be made and what the consequences are for non-payment. With some business the sales agreements will be highly detailed or bespoke agreements which will need legal advice however for the vast majority of businesses generic and template sales agreements are more than adequate to cover the needs of the business.

Such sales agreements are relatively easy to come across and are cost effective however even companies that have such agreements pay very little attention to the payment terms and whether they reflect the operation of the industry they are in. I have come across a number of businesses which in order to reduce bad debts from occurring and to maintain a better cash flow insisted that all invoices are paid either immediately or within 14 days. The problem is that the accounts department did not encourage payment by the deadline and customers therefore were not abiding by them. As such the debt recovery system became disjointed and rather than ensure better cash flow and less bad debts they found their problems were even worst.

This problem could have been overcome by giving a more reasonable time to pay the invoice and sticking to that time frame. A more sensible way forward would have been to assess on the basis of your cash flow how long you can give customers time to pay. When you decide on a suitable date, don’t let the date pass without some action. For instance you could write or talk to your customer 7 days prior to the deadline reminding them of their need to pay.

Interest can be applied to the debt

If after the 7 days still no payment has been made you can apply interest under the Late Payment of Commercial Debts (Interest) Act 1998. If the customer has failed to pay the debt after the agreed payment date and the contract was made after the 16th of March 2013 interest of 8% over the BOE rate can be applied after the payment date and not 30 days after the invoice was issued.

You should contact your new debtor highlighting this fact and the entitlement to apply a fixed rate of interest over and above the simple interest that is now gathering. In order to be supportive and incentivise your customer you could allow the customer to pay within a set date without the interest being applied.

If the customer does not pay in accordance with your second letter you will have very little option but to set a deadline of when enforcement action will be taken. It should note that a business could set out this timeframe within the sales agreement so that their customer fully understands what is going to happen.

This system will not ensure that a company will have no bad debts however if employed and dates are adhered to customers are less likely to put you at the bottom of the list for payment. There will however be occasions where customers for whatever reason fail to pay. In these situations the business is faced with incurring more costs trying to recover unpaid invoices or to write the debt off completely. A great deal of debt is written off by businesses on the basis that they believe they are throwing good money after bad.

Customers can be charged the cost of recovering a debt

As with your payment terms your sales agreement could easily include a clause which requires the customers to pay for the recovery of the debt. This is not an extreme clause as commercial contracts since 16th of March 2014 have an implied term that the business can recover reasonable costs associated with the recovery of the debt. According to the Late Payment Directive reasonable costs can include “instructing a lawyer or employing a debt collection agency”.

This implied term or an express term in your sales agreement can allow your business to consider enforcement action or court action in small claim cases where before the vast majority of the legal fees incurred would not be recovered.

The implementation of a debt recovery system from the very beginning which is fair, reasonable and firm is an essential benefit to any business and even in cases where the customer refuses to pay the perceived burden and risk of additional costs can be reduced considerably ensuring that bad debt is kept to an absolute minimum.

Fishers Solicitors offers a wide range of cost effective debt recovery support whether seeking payment from a debtor or providing internal solutions for your business.