Minimising the risk of bad debt

by Alex McKnight

Could your business afford to write of £14,000 worth of debt?

Earlier this year a Leeds University Business School report claimed that a small or medium sized enterprise writes off a whopping £14,000 of unpaid bills every year!

Even when people do pay up, credit terms are stretched: nearly 40% of SMEs have to wait 31-60 days after invoice, before they get their money.

Although some may argue that dealing with late payers and the associated cash flow problems are just part of being in business, steps can be taken to speed up payment and to minimise the risk of not being paid at all.

Difficulty later may be prevented by a simple and routine precaution at the outset, namely to find out, when someone contacts you with an enquiry or to place an order, exactly who the potential customer is.  The acceptance of an order brings into being a contract with the customer and before that you need to know exactly whom you’re dealing with.

Usually your customer will be an individual, a partnership or a limited company, but, if confusion/uncertainty is to be avoided later, the time to find out which is at the very outset.

A further complication is that each of those 3 different types of customer might carry on business under a different trading name.  For example, if a potential customer gives his/its name to you as “Dodgers”, you’ve no ready means of knowing – unless you ask (and are told), before or when accepting the order – who exactly might be trading under that name.  There is a range of possibilities.  Thus it could be:

* Dodgers Ltd.
* Dodgers (a partnership)
* John Bull (a sole trader), trading as “Dodgers”
* John Bull & Co. (a partnership), trading as “Dodgers”
* John Bull & Co. Ltd., trading as “Dodgers”

Unless you know which it is, how would you know whom to sue?

With enquiries/orders from familiar/established customers you may well know – without having to ask – exactly whom you’re dealing with.  Again, even in the case of a “first timer”, the details may be clear, if a written enquiry/order is received on letterhead, which identifies the customer clearly.  In other cases, however:

* ask for and note down the name (first name and surname) of the person making the enquiry/seeking to place the order
* ask whether the person is a private individual or, if not, whom the person represents – i.e. on whose behalf the person is speaking/who the customer will be, if you accept an order – and for the full address
* having been told whom the person represents, ask any further question(s) necessary to establish the position more clearly.  Thus, if the person says he/she represents “Dodgers”, ask exactly whose trading name that is or who the proprietor of that business is, the aim being to ascertain whether you are dealing with a sole trader, a partnership or a limited company and his/its exact name and address
* if the person, making the enquiry/seeking to place the order, is unable or unwilling to give clear answers to your questions, before accepting an order ask him/her either to find out the answers and then speak to you again or to submit the enquiry/order to you in writing on the letterhead of the business concerned
* if you don’t get the information you’re seeking, don’t accept an order

This may all sound too stiff and tedious to be put into practice, but it’s worth doing, because you’ll never have a better chance to get the answers, which could avoid problems later and could even make the difference between getting paid and not getting paid.

However, in the event of non-payment, don’t let matters drift.  Failing payment by the due date, action should be taken immediately.  Don’t let the debtor think you may forget about the matter, if he simply lies low.

A polite letter or – often more compelling – a personal phone call may be all that’s needed, but, if those methods fail to produce swift results, don’t delay in putting more cogent measures in place.  A formal letter, stating that the matter will be referred to solicitors or debt collectors, if payment isn’t received within 7 days, will tend to show that you mean business and frequently is sufficient to extract payment from the recalcitrant payer.  A letter threatening the issue of proceedings can be even more persuasive.  However, don’t make threats that you don’t intend to carry out: word can get around within the local community.

In the case of a limited company a formal statutory demand, giving notice that the company may be wound up if the debt is not paid, will often produce results.  Unless the company is hopelessly insolvent, the statutory demand can be an effective method of ensuring that your debt is given priority over others.  A solicitor can prepare and serve the statutory demand on your behalf.

If the worst comes to the worst, you may have to contemplate court proceedings against the debtor.  Make sure that the time for responding to any pre-action letter is diarised effectively and that, if payment is not received within the stated time, you decide promptly either to write off the debt as a bad debt or alternatively to move on to the next step.

Assuming that you decide to take proceedings, their preparation and issue in respect of a straightforward debt should be swift and inexpensive.  Nowadays proceedings can even be issued on line.  Here again it’s important to diarise the debtor’s time for responding to the claim and to move on to the next step promptly, if no response is received.  The court will not move matters forward without input from you, but, if solicitors are acting for you, they will take care of that aspect for you.

Alex McKnight is an associate solicitor at Burnetts Solicitors, specialising in civil litigation.  Along with partners, Patricia Hall and Michael Cousins, Alex will be presenting a free debt recovery seminar for businesses at Burnetts’ Victoria Place office on Wednesday 11 October at 5.30 p.m..  During the seminar there will be advice on minimising the risk of non-payment, collecting interest from late payers and how to enforce court judgments.

Although the seminar is free, pre-booking is essential.  To reserve your place or for further information on debt recovery contact Alex on 01228 552222 or by email: arm@burnetts.co.uk

Sept 2006