Debt collection for small businesses

Debt collection has rarely been as important for small businesses as it is today. As an increasing number of customers and clients default on payments, businesses have to resort to ever more drastic methods to ensure they receive their cash.

There are a variety of means by which businesses can attempt to collect debts. Much of the work can be done in-house, as a reminder letter is frequently all that is needed to make a client pay up. However, in more severe circumstances you may have to consider taking further action.

When is a payment considered late?

Most business sectors have standard, established payment terms. For example, invoices might be expected to be settled within 45 days of the date on which they are received. Some companies give their clients up to 60 days to settle their accounts.

However, in cases in which there is no written agreement concerning the payment period, a payment is considered to be late under law when the invoice has aged for 30 days, or when 30 days have elapsed after the date of the delivery of goods - whichever is later.

It is perfectly legal to set a payment term shorter than 30 days, but this must be agreed upon in advance. For example, many companies insist on payment on delivery of goods or services. But, regardless of the payment terms you set, you cannot take any further action to get your invoices settled until the agreed payment period has expired.

After that point, there are a variety of options from which you can choose.

DIY debt collection

A reminder letter or phone call is frequently all that is required to get your client to settle their invoice. In the majority of cases the client will simply have forgotten to pay the bill, and will do so when reminded. In other cases they may be trying their luck, hoping that you have forgotten. Either way, a letter followed by a phone call is often enough to get your money.

If your invoice remains unpaid after a few attempts at contact, you should consider escalating the dispute by seeking some professional assistance. Depending on the size of the debt, this may or may not be a viable option - obviously, if the value of the invoice is less than the cost of recovering it, it is probably not worth trying to get your money back via a third party.

However, if you are trying to recover a fairly large invoice, you might consider one of the following methods:

  • Engaging a solicitor
  • Hiring a debt collection agency
  • Beginning court proceedings

Professional debt collection services

Engaging a solicitor can be amongst the most cost effective means of debt collection. Solicitors will be able to draft and send legally sound letters threatening further action in the event that the invoice is not settled. This type of letter will carry significantly more weight than one from your company, and will often result in miraculously prompt payment.

You should make sure that you agree a set fee in advance of a solicitor doing this work, unless you already have one on retainer. Bear in mind that the work involved for them is negligible; you are paying for their headed notepaper more than anything else.

The next step is to hire a debt collection agency. There are a number of important advantages and disadvantages to be considered here. Debt collection agencies can be a quick method of recovering your cash. By their nature debt collection agencies are likely to be more forceful than you, and the threat of having their company wound down or credit record sullied will be enough to get all but the most intransigent customers to pay up.

However, there are number of potential downsides that you should bear in mind. Primarily, debt collection agencies can be expensive; they will normally charge around 10 per cent of the value of the debt. Furthermore, some agencies are rather too heavy handed. While this might get your money back, it may also do irreparable damage to your company’s reputation. Similarly, there is little chance of retaining the customer if they are faced with a debt collection agency. Informal negotiation is a better option if you intend to do business with the customer in the future.

Court proceedings

In some cases, beginning court proceedings is the only realistic option. From the outset it should be remembered that court proceedings should be a last resort; in the event that your case is heard by a judge, they will want to be satisfied that you exhausted all other avenues beforehand.

The nature of the court action will depend on the size of the debt. If the sum in question is less than £5,000, it will be dealt with by the small claims track of your local county court. This is designed to be a cheap and easy means of accessing the justice system, and will not require you to hire a solicitor.

Most claims under £100,000, including small claims track cases (note that, contrary to popular belief, there is no such thing as the ‘small claims court’ - just a separate ‘track’ of your local county court), can be lodged through the government’s Money Claim Online website.

If the amount in question is over £5,000 but less than £25,000, the case will be heard in the regular track of the county court. In these instances you may wish to seek the help of a solicitor as the process is slightly more opaque than that of the small claims track. If the value of the claim is more than £25,000 you will certainly need the help of a solicitor as the case is likely to be heard in the High Court.

In reality, however, the majority of cases never actually get as far as court. You should start by sending a notice of intent to the debtor, informing them of your intention to take the case to court. Make sure that you attach a ‘claims schedule’ to this letter giving details of what you are owed, and send it by recorded delivery.

If the debtor is a business, you should state that you will be applying for an order to formally wind up the company. In the vast majority of cases this will be enough to persuade them to pay up. If this does not succeed you should think about whether or not you actually want to go to court. Bear in mind that you will be liable for the other party’s legal costs in the event that your complaint fails - so you must be confident that you will succeed.

Factoring

If it is arranged in advance, factoring can be a useful way of ensuring that your invoices are paid on time. Part of this process involves passing your invoices on to a ‘factor’ - a company that will then pursue the debts on your behalf.

The most beneficial aspect of factoring from your point of view, however, is that the factor will advance you a percentage of the value of the invoice very quickly - in fact, frequently within 24 hours of it being raised. This means that you can have as much as 90% of the invoice settled almost immediately. The factor can then assume responsibility for ensuring the customer pays up, and will pass the remainder on to you (less a fee) when that occurs.

It is vital that you find a factor that understands the nature of your business, and with whom you feel comfortable. Simply Business can find you the perfect factoring partner for your business - get quotes now.

As the recession has hit home, many companies are finding that it is taking longer and longer for invoices to be settled. Similarly, default rates are increasing rapidly. As such, it is important that you develop a plan to deal with late payment or defaults.

While engaging the services of a solicitor or debt collection agency can be beneficial, you should also make sure that you take proactive steps to ensure that any potential problems with late payment are mitigated from the start. Developing clear payment terms and a good relationship with a factoring company will help prevent the necessity for debt collectors and court proceedings.