Having debtors is part and parcel of business. Having debtors, who use your company as an unofficial line of credit, is increasingly becoming more prevalent.
Getting the debtors, who are in excess of their terms of payment, to pay their bills can be a difficult and time consuming activity.
In this article, I’ll lay out some of the options available to you.
Initially, soft contact options are best. After all, the debtor may have lost paperwork or been so busy that they may believe it has already been settled. Soft contact options should start with an email with attached statement, giving the amount now due. No need for excess detail or tough words, after all it’s a polite reminder.
If no response is received after 2 working days, make a phone call. The email will be so far down the debtors’ inbox after this time that they will not pay attention to it. So touch base with the person who placed the original order or the person who deals with the accounts payable. Again, this is a gentle reminder; give the amount owed and any purchase order reference that may be applicable. Offer assistance, invoice copies or even a call back at a more convenient time and follow up on these.
What you want to get from that phone call and what you want to drive them to is:
• An amount they will pay
• A date they will pay by
If there are obstacles getting in the way of this, remove them. Some typical examples are:
• No invoice copy; email one straight away
• Debtor awaiting cleared funds; get part payment or if not too distant a date agree a temporary extension to the due amount until that date
• The person who signs cheques is not in the office until a future date; give your bank details and ask for a BACS transfer
The plus side of starting with the soft options is that you do not unduly upset your customer and you are more likely to get paid at this stage. The down side is that the soft option can take between 4 and 6 weeks to exhaust.
Always start soft and always offer assistance but do not remove the debt, offer discounts, offer credits or extend terms on a permanent basis. As these will only allow the debtor more assurance that they can continue to use you as a credit facility.
The trick is to firmly drive them to settling their debt but without them feeling threatened but with them feeling you are trying to help.
The next stage is less pleasant and may result in you losing the client but will have a better chance of getting the debt paid. You email / letter them and threaten to apply statutory interest and compensation.
Under the terms of the Late Payments of Commercial Debts (Interest) Act 1998, you are entitled to claim statutory interest and debt recovery compensation on the outstanding sum. Statutory interest is calculated at 8 per cent above the Bank of England reference rate, set on 30 June and 31 December, from the date the debt became due.
There is a sliding scale on the compensation charge you can levy and this depends upon the amount of debt owed. For example, if under £1,000.00 then the amount of compensation for debt recovery costs you can claim is £40.
However, before applying any charges, you should:
• Consider the relationship with the customer
• Get the opinion of customer-facing staff
• Assess your credit management system
• Find out the general industry practice
If you decide to apply the charge, you should notify the customer in writing. You should also send them a new invoice with the charge itemised as an additional amount and the outstanding total debt adjusted accordingly.
Purchasers cannot contract out of the late payment legislation, that is they cannot deny the supplier their statutory right to, for example, charge statutory interest.
If the debtor continues to avoid settling their debt, the next stage is a legal one.
A solicitor’s letter warning that you will consider issuing a county court claim can produce quick results. Solicitors charge a pre-arranged fee for this service. It is advisable to use a solicitor who is experienced in debt collection and court based collections.
This article has concentrated mostly on the non-legal options, as these are the ones you would have most control over and are the most likely to get results.
MBB Business Services has a wealth of business skills and expertise available to help you run your business and get on with those activities that generate your income.