Managing cash flow is an important part of running a successful business. When income drops and cash flow dries up, business owners face tough decisions about their debts and financial obligations. Failing to address these challenges promptly and effectively can jeopardise their future survival.
Keep reading to learn our top seven considerations when creating a debt recovery process.
When Clients and Contractors Don’t Pay
In today's landscape, where economic uncertainties are a constant threat, it has become increasingly crucial for business owners to be proactive in their debt recovery strategies. Recovering owed funds not only ensures their business's financial health but also prevents it from being left in a vulnerable position among a long list of creditors.
By staying on top of your cash flow and actively pursuing outstanding debts, you can safeguard your business's stability and secure its future growth. Add these seven steps into your debt recovery process and you cannot go wrong.
1. Know Your Terms and Conditions
When owed money, businesses should initially refer to their standard terms of business to gain a thorough understanding of their rights and obligations. Within these terms and conditions, there might be specific clauses addressing force majeure, acts of God, or credit control measures that can prove beneficial. In cases of uncertainty, seeking guidance from a legal professional, such as a solicitor, is strongly recommended to obtain informed advice.
2. Update Current Credit Control Procedures
Consider revisiting your existing credit control procedures and making necessary updates. This is an opportune moment to assess the steps you take to pursue unpaid invoices, the methods employed, the responsible parties, and the timing of such actions. Many businesses discover that sending a demand letter from a solicitor, urging payment for overdue invoices, yields more favourable and prompt outcomes compared to attempts made directly by the owed business through phone calls, letters, or emails.
3. Monitor Your Business’ Debtors
Renowned retail brands such as Debenhams, Oasis, Laura Ashley, and Carluccio's have faced insolvency in recent times, and it is expected that other lesser-known businesses have experienced similar difficulties. Monitoring which companies are facing these financial challenges is crucial to your debt recovery process.
Before any business appoints an administrator, it is mandatory to advertise this in The Gazette (formerly the London Gazette). Additionally, you can monitor the records of these companies through Companies House and utilise a feature that enables you to keep track of a specific company. By doing so, you will receive alerts whenever the company files documents or updates its information.
It remains essential to conduct an assessment to ascertain the validity of any claims regarding financial hardship. Subscribing to corporate information providers like Dun and Bradstreet can prove valuable, despite the associated subscription fees they may charge.
4. Negotiate a Solution
Prior to contacting a customer regarding non-payment, you should consider various options and prepare yourself for what you are willing to accept or not. These options include:
Discounts
You may choose to accept or offer a discount on the invoice price as a means to promptly collect the payment, even if it involves absorbing a financial setback. However, it is crucial to communicate clearly to regular suppliers that this discount is a one-time occurrence. It is important to note that debt recovery through legal means may be challenging due to current resource constraints within the court system, particularly in cases where a dispute is anticipated.
Insolvency Risks
Exercise caution when dealing with customers who may be on the verge of insolvency. If a business is insolvent, it is unable to prioritise one creditor over another. Even if you manage to recover an overdue invoice, there is still a possibility of a later claim for repayment by an insolvency practitioner. This risk diminishes over time from the payment date to the insolvency event. It is advisable to consult with your solicitor, particularly when a significant payment is due, for appropriate guidance.
Documenting Part-Payments
In situations where a payment is made for an amount less than the invoice price, it is important to create an addendum that is mutually agreed upon and signed by both parties. Your solicitor can assist you in preparing this addendum, ensuring clarity in the payment terms while safeguarding your rights to claim the full amount should circumstances change in the future.
Deferral of Payments
If you are contemplating allowing a deferral of payment, it is essential to consider the security measures you can obtain. This may include a director's guarantee, a fixed or floating charge, or a lien on the goods you continue to supply. Seeking guidance from your solicitor is recommended to determine the appropriate measures and to draft the necessary documentation.
Future Free Supplies
In some cases, it may be advantageous to engage in a conversation centred around a shared understanding of the current situation. If you genuinely believe a request for additional time to pay is valid, it might be more commercially favourable to pause debt recovery and request that the supplier extend credit for future supplies once business operations return to normal. It is important to consolidate any such arrangement in writing, and your solicitor can provide assistance in preparing the required documentation.
5. Chase Your Payment
In the event of a customer failing to make bill payments, it is advisable to temporarily halt any further work on credit terms until the account is brought up to date. It is essential for businesses to persist in sending letters requesting payment for outstanding bills.
6. Threaten an Insolvency Process
Businesses can utilise statutory demands and winding-up petitions to threaten the insolvency process to help retrieve owed debts.
Statutory Demands
A statutory demand is a formal written notice issued to the debtor, demanding payment of the outstanding debt within a specified timeframe. If the debtor fails to comply with the demand, it can be used as evidence of insolvency when pursuing a winding-up petition.
Winding-Up Petitions
A winding-up petition is a legal document filed with the court seeking the compulsory liquidation of the debtor's company. It is typically initiated by the creditor and indicates that the debtor is unable to pay its debts. To proceed with a winding-up petition, the debt must be at least £750 and must be undisputed or proven.
To incorporate these measures within a debt recovery process, the following steps are often followed:
- Assess the debt and evidence: Ensure that the debt is valid, properly documented, and meets the necessary criteria for statutory demands or winding-up petitions.
- Issue a statutory demand: Send a statutory demand to the debtor, specifying the outstanding debt and providing a statutory deadline (usually 21 days) for payment. Highlight the potential consequences of non-compliance, such as the initiation of a winding-up petition.
- Professional advice: Seek guidance from an insolvency practitioner or solicitor who specialises in insolvency matters. They can assist in the proper preparation and delivery of the statutory demand and provide advice on the potential outcomes and risks.
- Evaluate the response: If the debtor fails to comply with the statutory demand within the specified timeframe, it can be used as evidence of insolvency when pursuing a winding-up petition.
- File a winding-up petition: Engage legal professionals to assist in drafting and filing the winding-up petition with the appropriate court. The petition should demonstrate the debtor's inability to pay the debt and provide supporting evidence.
- Court proceedings: The court will review the winding-up petition, and if satisfied with the evidence, it may issue a winding-up order. This can result in the compulsory liquidation of the debtor's company, potentially leading to the realisation of assets to repay the debts owed.
7. Recovery of Debts Using the Courts
In the UK, businesses have the option to pursue debt recovery through the courts. This process involves taking legal action against the debtor to secure repayment of the outstanding debt. To initiate the process, the creditor must typically file a claim in the appropriate court and provide evidence supporting the debt. The court will then issue a claim form, which is served on the debtor. If the debtor fails to respond within the specified timeframe or disputes the claim, the creditor can proceed with obtaining a judgment.
Once a judgment is obtained, various enforcement methods can be employed, such as instructing bailiffs to seize assets, obtaining a charging order on the debtor's property, or applying for a winding-up order to liquidate the debtor's company. It's important for businesses to be aware that the court system may have resource issues, leading to delays in debt recovery. Therefore, it's advisable to assess the feasibility of alternative methods, such as negotiation, mediation, or considering the use of debt collection agencies, before resorting to court action. Seeking legal advice from a solicitor experienced in debt recovery can provide valuable guidance throughout the process.For more advice on any commercial or civil dispute issues, please contact our expert litigation solicitors on info@witansolicitors.co.uk.
