Opinions and insights from Roythornes' corporate and commercial law team.
Avoid a Christmas (debt) hangover
- AuthorCatherine Rickett
As a business, you may have seen an increase in sales during the run-up to Christmas – which is great news – until your customers are late making payment and your cash flow suffers as a result.
It’s pretty common for people to overspend at this time of year, and most will focus on spending money they don’t have on presents for their loved ones, rather than pay off the debt owed to you.
December can therefore be a tough month for businesses. The increase of online shopping may mean that sales have declined; your own outstanding invoices can become due, and income may be affected by closing over the holiday period. Added to all that is the extra pressure of parties, bonuses, and holiday pay.
Recent figures released by the Registry Trust confirm that, during the third quarter of 2018, 32,629 County Court Judgments (CCJs) were registered against businesses in England and Wales, meaning that a total of £100.2m was owed by commercial entities.This represents an increase of 32% from the previous year. The average commercial CCJ has a value of £3072.00, and the total figures show that if you have even one debt owed to your business, the effect could be detrimental if you do not have measures in place to protect yourself.
The worst thing which could happen is that your customer’s business fails in the New Year, before you have had the chance to get paid. The best way to protect yourself from dealing with a potential insolvency is, above all, to know your client, and to put in place a few precautions.
Know your client! Consider undertaking a credit check on new or even existing customers if you are having difficulty in obtaining payment. It may be that your customer is unable to make payment due to their own financial problems. Account application forms are an excellent way of identifying your customer from the outset. You need to know who you are contracting with in order to pursue the correct person later on if necessary. It’s very simple to carry out a free check of the Insolvency Register before allowing a customer credit, and credit checks can be undertaken for a relatively low fee.
Make it easy for your clients to pay. The easier you make it, the more likely is it that they will pay you. Consider having card payment facilities, BACS, direct debit, online payments or even PayPal. Be proactive about collecting payments from clients. Have solid, late-payment penalties and collections polices in place, and stick to them. Ensure that you keep copies of correspondence with the client including call logs, emails and letters and proof of delivery or collection. These may prove invaluable if the matter proceeds to court.
Consider applying an incentive for early payment. Money is better in your pocket than in your debtor’s and whilst you may feel uncomfortable lowering your prices for early payment, sometimes it can cost more to recover a debt than any discount applied.
Have clear procedures. You need effective systems in place, with standard letters going out on the day after an invoice is due, seven days after, etc.
Keep a ‘cushion’ of ideally three months’ operating expenses to protect you from unexpected cash flow issues. Bad payers are a business reality and if your company is working from an account balance of nil, one slow sales month could mean instant disaster.
If you do happen to find yourself in the unfortunate situation of being unable to recover your money, there are a few things to be aware of, which could help allay your concerns over the costs of recovering the debt.
If you have a term in your contract for interest, then you must adhere to it. Otherwise, for commercial debts, the Late Payment of Commercial Debts (Interest) Act 1998 gives protection to businesses which are owed money by other businesses in terms by assuring interest is payable at 8% above base rate.
In addition to this, you can claim late payment compensation and recovery costs under the Late Payment of Commercial Debts Regulations 2002 and 2013. These regulations provide that as a supplier, you would also be entitled to a fixed sum of compensation: £40.00 for a debt less than £1000; £70.00 for one between £1000 and £10,000; and £100 for debts over £10,000. Costs incurred by creditors when instructing a lawyer or debt collection agency are recoverable, however, once the matter proceeds to court, it will be for the court to decide what costs are payable, dependant on the type and value of the claim.
If the debt is paid, but paid late, you are still entitled to claim late payment compensation and interest up to six years later.
At Roythornes we can help with any aspect of debt recovery, and at any stage, for very reasonable fixed fees. If you require any further information, please contact Catherinerickett@roythornes.co.uk.