PROTECTING YOUR SMALL BUSINESS: HOW TO DEAL WITH DEBTS
Recent statistics* show that fifty per cent of invoices owed to small businesses are overdue, and nearly a quarter of SMEs have been pushed into financial crisis by late payments. With small businesses making up 99% of all UK business, these are shocking facts.
As a small business ourselves, and one that specialises in providing legal support for debt recovery and late payment, the issue of late payment is very important to us.
But there’s no need to suffer in silence, waiting patiently for the payment that might never come. Here are some ways to be more proactive in getting paid:
1. Account opening form/credit agreements
Ensure that you get your customer to complete an account opening form which clearly states your invoice payment and credit terms. Not only will you capture valuable information about your customer, enabling you to make an informed decision regarding their credit worthiness, but you will be able to ensure that they are aware of your payment terms.
2. Credit check/get references on your customers
Credit checking is commonplace in many areas, so why not use this yourself to ensure that your new customer hasn’t got a history of non-payment and financial challenges. Another option is to ask them to provide references from their bank or other organisations they have commercial relationships with.
3. Invoice quickly
This is a simple approach but can make all the difference. Invoice as early as possible to get funds in sooner. This way a late payment has less impact generally and less knock-on to your own payments.
4. Build relationships
Chasing payments isn’t a fun business, but the better you know your customer, the easier it is to give them a call and remind them of an outstanding invoice. What feels like a chat and a catch-up is a really effective way of getting a payment made. While most of us focus on building relationships with the owner or purchaser, you should also try to get to know the cashier or accounts person at your customer’s office. When payment is late, you’ll know who to speak to.
Build a reputation for being hard on late payment. If your customers believe you won’t chase them for payment, they’re more likely to pay at their leisure rather than within your timeframe
6. Personal guarantees
If you have concerns about a customer’s creditworthiness, don’t be afraid to ask for personal guarantees. If the customer has nothing to hide and is committed to honouring your terms, then they should have no objection to providing this security.
When things get serious
If friendly chasing is getting you nowhere, you might wonder what the next steps are. Some options include:
- Factoring – where you sell your outstanding invoices to a bank or factoring organisation at a discount. This gives you instant cash, but at a value that’s significantly less than that you’re owed. A couple of big downsides to this arrangement are that you typically you would need to give control of your account over to your bank and should the debt remain unpaid after 6 months, then the bank or factoring organisation would return the debt to you and demand repayment of their advance.
- Debt collection companies – where you engage an agency to work on your behalf with your debtors, by assessing their ability to pay and working out a suitable payment schedule. You can cover the costs of this by adding a debt collection fee to your invoice, if you have stated this approach in your credit agreement or contract at the outset. However, if your customer refuses to pay, then the debt collection company would have to either return the debt to you or to instruct a law firm on your behalf, thus adding another company to the chain.
- Legal action – instruct a law firm to write to your debtor and explain that you will pursue legal action to get paid. The letter itself often gets the desired result! If not, your solicitor has the power to pursue court action to retrieve the monies owed. As most debtors won’t want to face legal action, this method can prove to be a cost effective and professional way to expedite a resolution.
Ferguson Financial Solicitors is a law firm run by business people for business people, so we understand the challenges you face and what you need to resolve them. If you have any concerns about outstanding debts, we can help – just give us a call.