Tahir’s Tips: Tackling Bad Debt
Bad debt – a word guaranteed to send a shiver down the spine. Increasingly the fashion press has been reporting on established fashion businesses closing stores due to escalating costs and declining footfall. According to the Centre for Retail Research for the 12 month period in 2013, 49 retail businesses failed resulting in 2,500 stores and 25,140 employees being affected.
In difficult economic circumstances cash flow is king, which makes the pursuit of late payments an eternal bugbear for small to medium-sized enterprises. Late or non-payments produce knock-on effects that impact upon a company’s ability to pay its suppliers and even jeopardize its own solvency. Companies go bust when they run out of cash, and a stack of unpaid or overdue invoices will be of scant consolation in such circumstances. The law is on the side of creditors, of course – but a rush to the courts is rarely advisable in the first instance. Legal procedure requires other avenues to be explored before going to court; and besides, valuable business relationships deteriorate rapidly against a backdrop of escalating legal fees.
A mutual understanding of all the mechanisms of debt recovery can help forestall problems, and hopefully keep that cash flowing. So here are my tips;
Payment Protection :
1. Closely monitor your cash flow and ensure invoices are being paid when they become due – well before late payments hinder you meeting your own contractual obligations, let alone threaten the business.
2. Payment terms and late fees should be agreed in advance of any work in writing. The preferred route is to have your own terms of business which can be attached to your invoices and which set out your payment terms. The date by which payment must be made and the consequences of late payment should be expressly stated. Failing that, reach agreement in relation to fees before issuing an invoice. The invoice, on its face, can confirm the fees are agreed, enabling a statutory demand procedure to be employed subsequently if required. In the absence of any other expressly written agreement, a supplier can also try and rely on late payment legislation. This provides a default period of 30 days by which fees are to be paid and allows you to claim interest on late payments, together with a modest charge to cover their collection.
Any supplier owed money should consider the following steps before initiating costly legal proceedings:
1. The first step should be a conciliatory approach. Besides potentially saving the loss of a customer and keeping costs down, the law requires you to try some alternative dispute resolution processes before litigation.
2. A third party might be called in to broker a compromise between the supplier and the purchaser, particularly when there is a dispute as to whether late fees are properly due.
3. A less costly alternative to legal proceedings is the service of a statutory demand on the purchaser. The latter gets 21 days to make its payment, after which time you can petition for bankruptcy or liquidation, as appropriate. To be entitled to serve a statutory demand, the fees must not be in dispute.
4. Before initiating legal proceedings, determine whether your debtor is sufficiently solvent to pay you. If it isn’t, then winning in court is of no commercial benefit and your legal costs are wasted. A court judgement against a non-paying party is a significant penalty. A County Court Judgment remains on record for six years, and can hinder applications for credit, while continued non-payment allows you to seek redress through bailiffs, charges against property or earnings, or third-party orders (where the debtor is owed money by someone else).
Nevertheless, any company would far prefer to avoid the risk and overheads of bad debt. Ultimately, choosing customers wisely (including if possible, a consideration of their payment history) is the most prudent step of all.
For more information on Industry member, Tahir visit his personal partner page on the Sheridans website. To contact him directly, visit The Industry Directory, email [email protected] or telephone 020 7079 0103.
