Late payment is a blight on small businesses. During 2009 it reached epic proportions, bringing many to the point of collapse. Here’s how to handle those who refuse or are unable to pay
If there’s one annoying thing about going it alone, it’s when someone doesn’t settle their bill. Instead of a satisfying payment into your account, you end up making endless difficult and frustrating phone calls, and writing increasingly unpleasant letters and emails, all the while draining your resources and time. Recent research from NatWest/RBS found that 71% of businesses experienced this type of scenario during 2009, and the time spent waiting for payment is getting longer.
The survey estimates businesses in the UK are owed a whopping £15.7bn for invoices that have been outstanding for 120 days or more. Stephen Bentley, chief executive officer of Granby Marketing, a £4.5m revenue business, is among the majority when he expresses his concern over such figures. “My first reaction was that it was higher than anticipated,” he says. “I was surprised and, quite frankly, disheartened by it, because cashflow is the difference between successful businesses surviving or not.”
The recession was a tough time for a lot of entrepreneurs, and many will agree that the spectre of pre-pack administrations, phoenix companies and deliberate late-payers was a particularly galling sight. The sad truth is, however, that some clients are simply not in a position to pay, due to the weakness of their cash position. Others just prefer to avoid payment until they feel there’s no alternative. Entrepreneurs need to distinguish between the two and then adopt the right tactics to best ensure they get their cash.
Money due
Good administration and monitoring is key to reducing late payments, as Roger Avery, finance director at The REaD Group, a £12.8m revenue data products business, explains. “Keep tight credit control procedures in place, know your clients, monitor payment history and look out for any decline,” he advises. “But most importantly, keep in regular contact with your customers.”
Often a quick call or email will be enough to push through a late payment. But even with a good client, you should start recording the activity you make to chase a debt. Any future court action will depend upon proving you have made ‘reasonable’ efforts to secure the money. Keep any prompts polite and to the point, avoid arguments, but be firm and clear that you expect to get paid.
Stuart Miller, a senior partner at European law firm Miller Rosenfalck, says it is important to ascertain if the client or customer is a ‘can’t payer’ or a ‘won’t payer’. The former is worth negotiating with, while the latter is not. “You have to listen to the types of answers they’re giving you,” he says. “If they are prepared to be open and explain why they can’t pay and want to re-schedule payment, you might be able to agree a course of action. If they’re being evasive or contradictory then you probably have a ‘won’t payer’.”
If this approach brings no joy, it is time to inform them of your intention to take legal action and give them a reasonable deadline for payment – around 10 days should be sufficient.
Paths to payment
There are two main legal routes open to businesses when pursuing a client who is refusing to pay. The most simple is to go through Money Claim Online. This doesn’t take long, and you can get papers sent from the court for £35, which you can claim back if you are successful. You can also claim interest, which is easily calculable, and any other costs attached to the recovery of the debt.
Defendants are given a fortnight to reply, and you can track progress online. If there’s no dispute, you won’t have to go to court and, if the defendant doesn’t reply, they lose by default. Your debtor has the choice of paying or receiving a County Court Judgement (CCJ), which the banks are made aware of. However, the court cannot compel the debtor to pay, and if you want the debt enforced you will have to pay for the bailiffs, which will cost another £100.
This is a fairly low-cost and low-hassle approach. However, it has one major problem: it doesn’t always work. That’s because if bailiffs are used, they’re restricted in what they can take. A limited company with no major assets (it might lease its office equipment, for example) can be a poor target for the bailiffs. This can mean you lose money chasing a debt and, to make things worse, the debtor can still continue in business.
The second route is to pursue a winding-up order, which will close the debtor’s company unless they pay. Typically, you’ll need a solicitor to do this, as the documentation will have to be relied upon in court. They will write to your debtor and tell them that their business will face a court petition unless it settles the debt. If no money is forthcoming after 28 days, the petition is sent to court.
You will also have to pay for it to be advertised in The London Gazette. The resulting negative publicity can be very harmful for your debtor, so few will want this. Finally, unless the company pays, the business can be closed.
This is the more austere route and it can only be used for debts owed by businesses of £750 or more. However, Miller warns against using these tactics frivolously. “The courts don’t see winding-up petitions as a way to recover money per se, but rather to prevent a company from doing business when really it shouldn’t be,” he explains.
Negative publicity
Legal action should always be seen as a last resort. Aside from anything else, it will most likely sour a business relationship. Therefore, companies will often only do this when they have decided the relationship is not worth preserving. However, never forget that other businesses are also very averse to dealing with bad debtors, and a poor reputation for payment is a big black mark. In all likelihood, you will know people they know, and the mere threat of bad publicity might be more powerful than court orders or solicitors. You will have to make a judgment call on how you might use this tactic, and should always tread both carefully and legally.
Recently, some entrepreneurs have used social media, including Twitter, to get their message across to a persistent ‘won’t payer’. In one such case, the reluctant debtor, who had previously ignored all requests, suddenly proved only too willing to talk to his creditors. Social networks have remarkable power when it comes to spreading bad news, but use such methods wisely, sensitively and never in haste.
Pragmatic approach
Late payment is a major blight on small businesses and the law has its limitations. While innovations, such as Money Claim Online and the easy availability of late payment calculators are helpful, many firms are reluctant to undertake such actions for fear of losing business. Good administration, such as regular invoicing and robust credit checking procedures, can help, and firms need to adopt a pragmatic approach to recovering debts.
However, as Bentley says: “Most companies aren’t equipped to deal with flagrant non-payers. You’d like to think you’ve done your homework when it comes to choosing clients, and that they wouldn’t have any objections against paying to an agreed timescale.”
Unfortunately, often this isn’t the case, so make sure you’re business is forearmed to deal with ‘can’t payers’ and ‘won’t payers’ alike.