CASH IS KING
Post credit crunch and as the economy appears to be galloping towards recession, unfortunately, business failures are on the rise again.Cash flow is a major contribution towards failure, when a business cannot secure sufficient cash from debtors to fund its daily financial demands.
There are straightforward steps that all businesses can take to reduce and manage the risk of slow or non existent payment.
HOW WELL DO YOU KNOW YOUR DEBTOR?
This is a very basic proposition but one that too many fail to ask and sometimes not until it is too late.
It is understandable that this may be overlooked in the circumstances where a customer has approached you to supply your goods or services.
However, it is good business practice to know who you are trading with and can be absolutely essential at a later stage if legal steps require to be taken against them.
This can also have an impact on whether you are able to make a recovery. For example, if you contract with a limited company you will not be able to personally pursue its directors if the company is wound up. In those circumstances, you may wish to carry out credit checks or obtain personal guarantees from the directors.
Simple steps to identify a new customer are:
Clarify if you are dealing with an individual or a limited company.
Record their name and address.
If a sole trader, perhaps trading under a different name, record their name and home address.
If a partnership, identify all the partners and their home addresses.
If possible, record and check their trading name.
Do they have headed paper to confirm their identity?
Make use of the internet to check details.
A reputable customer should have no hesitation in providing these details. If not, why not?
If you sense a reluctance to provide detailed information, proceed at your risk.
In entering into a commercial relationship with a new customer, be aware of the financial impact on your business if a dispute arose. If high risk, this should be carefully managed to minimise that risk to you. For example, you may wish to consider cash on delivery.
ALWAYS HAVE A WRITTEN AGREEMENT
Any commercial relationship should be committed to writing.
The main advantage of entering into a written agreement or contract is that of certainty.
If formal contracts or agreements are in place, all parties know what they are expected to do: when, how and why.
The contract or agreement should set out clear obligations for each party, thereby avoiding any misunderstanding and potential dispute.
The contract or agreement should be signed by both parties and signed in advance of goods or services being provided.
You may think that this is onerous and potentially expensive, however, an initial investment spent at this stage can avoid greater expense if a dispute arises at a later date.
Basic items to put in writing are:-
Who the parties to the contract are.
What services or goods are to be provided by each party.
Costs.
How payment is to be made.
Timescale for payment to be made.
If supplying goods, consider a retention of title clause. This has the effect of you retaining title to your goods until they are paid for. Such clauses have become particularly relevant recently in the present climate where a number of clients have supplied goods to customers who have gone into administration. We have successfully argued with the administrators that the goods still remain the property of our clients and should not form part of the administration.
ACT QUICKLY WHEN THINGS GO WRONG
Do not accept delays in payment without explanation.
If payment is not made within the specified time, find out why.
Telephone the customer. Is there a problem with the service or goods supplied? If so, deal with the problem quickly, if possible. This avoids any reason to delay payment.
If there is no problem, find out when payment will be made.
Do not continue to supply services or goods if payment is not made without an acceptable explanation. All too often companies continue to supply customers who have no ability to pay and they are happy to continue to accept the supplies in the knowledge that they have no intention of paying for them.
Be persistent. Do not let the matter drop or be overlooked. If tackled at an early stage, you may be able to arrange some kind of payment plan. You may require to be flexible. A debtor who chooses to negotiate with you is usually acting in good faith and is better than a debtor who is simply ignoring you.
Identify someone in your organisation to be responsible for credit control. This is essential. Paper sales are no use if they are not converted into cash received.
GET THE LAWYERS INVOLVED
If all else fails and a debtor refuses to pay and provides no reasonable explanation, it may be time to involve a lawyer.
When you think of lawyers, businesses often think of court action. Whilst this might ultimately be the course of action which is required, lawyers can carry out preliminary procedures first.
The first of these is to send a seven day letter to your debtor. These are inexpensive and can prove extremely effective. A debtor who has been ignoring letters and calls from you will very often respond to a letter from a lawyer.
The debtor may be protecting their own cashflow position. They may have every intention of paying you, but are waiting until the very last possible opportunity to do so. A letter threatening court action within seven days very often presents that opportunity to them.
The next stage is if payment is not made to commence with court proceedings. This can be done by issuing a statutory demand for payment or a payment action can be raised in court.
A statutory demand is the first step towards insolvency proceedings. If dealing with companies, a petitioning creditor only needs to have a debt of at least £750 to proceed with liquidation proceedings. Expiry of a 21 day statutory demand, served by an officer of the court, which remains unpaid or which is not denied allows you to petition the court to wind up the debtor company. This can prove a very effective tool to force payment.
The second way to commence court proceedings is to raise an action for payment. In Scotland you can raise a small claims action up to the value of £3,000, a summary cause action between the value of £3,000-£5,000 and an ordinary cause action if it is above £5,000.
At the outset of a court action it is possible for a creditor, with the permission of the court, to attempt certain protective measures which may expedite payment through their inconvenience to the debtor or preserve assets pending the outcome of a defended litigation.
The first one of these is an arrestment on the dependence of a court action. This is a procedure whereby assets belonging to a debtor are frozen in the hands of third parties, for example, a Bank or monies due to a debtor which are held by a third party. This can have a devastating effect on the debtor’s cashflow and very often results in a frantic phone call from the debtor trying to resolve matters.
The second of these measures is an inhibition upon the dependence of a court action. If granted, this prevents the voluntary disposal of heritable property or in other words land or buildings by the debtor by way of a sale or granting of a security. Letters of Inhibition, as they are called, are personal against the debtor and not against any particular property. An inhibition upon the dependence can be done at the commencement of a court action or when a court order is obtained.
These are very effective and somewhat under used.
Ultimately, if successful in a court action, a decree or court order will be granted in your favour and recovery of the sums due should be made.
Given there is more than one option open to you at the outset, your lawyer will be able to advise what type of action is most appropriate for your particular circumstances. In this regard, the information you have gathered about your debtor will be of great importance.
BE COMMERCIALLY ASSERTIVE
In conclusion, be Commercially Assertive. Do not sit back and wait for payment to be made.
Take positive action to recover sums due to you.
If, as a business, you are assertive and consistent in your approach to debt collection, customers will respect you and the procedures you have in place for collection and, hopefully, pay their debts on time.
If you require any further information, please contact:
Lorna Bennie, Partner on 0141 227 6046 or email: lob@millersamuel.co.uk
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