Why do so many businesses struggle with collecting debts from slow payers

By Jay Sahota, Deputy Head of Civil and Commercial Litigation, Fisher Meredith LLP

In the current economic climate it is not unusual for businesses to find that customers are choosing to delay or even failing to make payments to their suppliers. Poor cash flow can make it difficult for a business to secure funding, thereby restricting its ability to grow or even threatening its entire existence.

Every business encounters customers who will not or cannot pay, but successful companies tend to have fewer bad customers. So why do so many small businesses struggle with collecting debts from slow payers?

1. What are my terms and conditions? Too few businesses know their terms and conditions and make sure at the outset that their customer does too. Ask yourself, what are my payment terms? Do I have a right to charge interest on late payments? Do I have the right to recover the costs of debt recovery? If you cannot answer each of these questions, then go and familiarise yourself and clarify or tighten your terms if necessary.
2. Who owes me money? When the customer walks through the door, who are they? Are they acting as themselves, or on behalf of a company or a partnership, or as a sole trader? If you do not know who your customer is then you will not be able to take action against them if they fail to pay.
3. Do they have the money to pay? Providing goods or services to a customer who does not have the ability to pay will inevitably lead to problems, so carry out simple credit checks of your customer beforehand to help protect you from late payment down the line. For individuals and partnerships, carry out a simple free bankruptcy search on the Insolvency Service website. For a company, check their status for free on the Companies House website. Check whether a customer has a County Court Judgment (CCJ) against them for a small fee at TrustOnline. If appropriate, ask your customer for credit references and make sure you check these.
4. Am I increasing the risk of late payment? If you accept payment by cheque rather than BACS or CHAPS payments you cannot be guaranteed that the customer has the money to pay. If you do not ask for a deposit or payment on account from your customer before supplying the goods or services there is the risk that they will not pay later or that they will encounter financial difficulties in the meantime. Does your business hold credit insurance to cover you if your customer becomes insolvent, or legal expenses insurance to pay the costs of recovering debts through the courts? If you have concerns, will a third party guarantee to pay if the customer does not?
5. Am I chasing late payment quickly? Many businesses fail to implement effective credit control and proactive payment management, thereby acquiring a reputation for being soft with customers who ‘forget’ to pay. Polite but timely invoices and reminder letters will help maintain your cash flow whilst ensuring your business relationships do not turn sour. Ensure that invoices and reminders are sent out as soon as payment becomes due. Remember: it is just as much your responsibility to secure payments to your business, as it is your customers’ responsibility to pay their debts.
6. Do I know my customers? Businesses sometimes struggle to collect debts because they have not taken the time to understand their customers’ businesses, how they work and their specific requirements. The customer who owes you money may have cash flow problems of their own, or maybe their date for payment receipts is in the middle of the month rather than at the end of the month. Talking to your debtors may enable you to agree a more appropriate payment plan.

If your customer fails to pay, then you may wish to seek legal advice as to the ways in which your business can chase the money you are owed by obtaining a county court judgment and, if necessary, the means by which that judgment can be enforced against the party that owes you money.

For further information about Debt Recovery, Telephone: 0800 014 7445

About the Author:
Jay Sahota is Deputy Head of Civil and Commercial Litigation, Fisher Meredith LLP. Email Jay.Sahota@fishermeredith.co.uk