Wouldn't all companies love it if their customers paid invoices on time? You wouldn't need to spend time chasing debts and you could concentrate on actually running your business. However debtors will most likely be ever present.
Businesses can invoice clients early, wait patiently for payment, send chase emails and be optimistic that payment will someday finally land at the bank.
But sometimes those polite little reminders, sending copy invoices and monthly statements are just not enough to deal with those customers who are adamant they are not paying.
So what can you do to ensure your business is paid the money it is owed? How do you collect debts from customers?
Choosing how and when you need to take formal action can be difficult and there are a few informal options at your disposal before starting legal action. After all, the last thing you want to do is spend time and money going to court for every invoice that is overdue by a few days.
But when you've exhausted the chasing letters and phone calls, we wanted to share our experiences and tips on how to collect debt from a customer, starting with establishing your legal position on the debt.
Proof of the debt.
While the vast majority of business debts won't require court action, it is important to establish your legal position and understand how to collect a debt legally.
In order to take a debt claim to court, you need to have some kind of evidence that the debt amount you wish to claim is due. In most cases a copy of your invoice, bill or order will suffice, however generally you should have evidence of:
With the above steps and evidence in place, you should be in a good position to start legal proceedings against the debtor.
However if the customer disputes the money is owed, for example because they believe the goods were faulty, you may need to take steps to investigate and resolve the business dispute before proceeding with formal debt action.
Legal help with non-paying customers.
Informal actions such as sending overdue notices, emailing the debtor's accounts team and speaking directly about payment should all be attempted yourself before you begin seeking assistance with recovering the debt.
But once you do decide to go down a more formal route to secure a payment you have a few options:
Option 1 - Submit a debt claim yourself
To make a court claim on your own you can use the HMCTS Money Claim Online service. It offers a process to recover the money your business is owed by walking you through the submission of an online claim and paying a court fee.
You need to be aware that these are court proceedings and so you should familiarise yourself with the 'pre action' rules along with what happens should you win your claim and receive a judgment. Ensure you read the associated Money Claim Online User Guide thoroughly before starting the claim process.
Option 2 - Hire a debt collector
When you hire a debt collection agency they will start chasing the debt and in some scenarios begin the legal process to recover it through the courts. You should bear in mind that debt collection agencies don't have any special legal powers beyond what you can do yourself. Generally a debt collection agent will also take a proportion of any debt that they are successful in collecting to cover their fees.
Option 3 - Instruct Debt Recovery Solicitors
A Solicitor should provide some general advice on the process and your prospects along with a fixed fee of what they will charge. If their fees are more than the money you are seeking from your customer, then you'll be better going with another route. However experienced debt recovery solicitors should have a fee structure which complements the amount you are wishing to recover and the complexity of the issue (i.e. it will be more complicated if the debtor defends the claim or disputes the debt being owed).
In the majority of debt recovery claims, the initial solicitor's 'Letter Before Action' often does the trick and the customer will opt to pay their bill rather than face court proceedings from a law firm.
If court action is needed a solicitor can explain the risks and advise on items such as recovering court fees and any statutory late payment charge that can be made. For example, interest may be able to claimed on top of the debt (usually 8% above base rate) via the Late Payment of Commercial Debts Act.
You may feel bad 'hounding' a customer about paying their debt or even getting a solicitor involved, but you shouldn't. You did your job and it is not your fault they have failed to pay you in a timely manner.
Being understanding to your customers while knowing your legal rights is what all responsible businesses should aim for.
Non or late paying customers are unfortunately a fact of life for most small to medium businesses. While at best delayed payments can be annoying, at worst they will have a measurable and detrimental impact on the smooth running of your business.
Recent figures via the Official Statutory Register of Judgments has given an insight into the potential scale of the problems around business debts and disputes that have been escalated to the courts.
The data shows that in the third quarter of 2020, and despite the pandemic, there were almost 16,000 County Court Judgments (CCJs) issued against businesses. The average value of each business debt is over £5,000, which is 79% higher than in the first quarter of 2019.
While there are fixed fee debt recovery services available to deal with most size B2B debts, needless to say it's more important than ever to make sure you have effective procedures in place for protecting cash flow in your business.
So, we wanted to share some of the proactive general advice that we've provided to our clients after helping them recover business debts owed to them.
Know your customer.
Is sounds simple, but make sure you know who you are doing business with.
Try to find out the size of the organisation and whether they are a partnership, sole-trader, limited company or PLC. What is their full legal name and do they use any trading names? Conducting a quick Internet search for these names may reveal information you need to be aware of.
Limited company checks.
Make use of public services such as Companies House to verify your private limited company customers.
When first considering doing business with them, verify their registered office, company number and trading status. You can use this information to find who owns the business and verify that the person instructing you has the authority to do so on behalf of them.
Then throughout your relationship put a reminder in to recheck these details periodically. That way you can be alert to any warning signs such as overdue accounts, charges being registered against them or large drops in cash reserves which may indicate their business is struggling.
Prompt Payment Code.
Check if your business customer is part of the Government's Prompt Payment Code (PPC) where those signed up are obliged to pay small businesses invoices within 30 days.
The current signatories can be found on the PPC website.
Whenever possible try to request payment in advance. If this is not possible, attempt to secure partial payment (for materials etc.) or some kind of deposit.
With some larger business customers it can take a while for a new supplier to get onto their accounts systems. So starting this process as soon as possible can speed up future payments.
Invoice as soon as the order is completed, or on lengthy jobs gain agreement to do so at periodic intervals. Knowing there is a payment problem half way through a job is better than finding out at the end.
Don't hide your payment terms.
Include standard payment terms within your T&Cs and on your invoices, ensuring they are clear and reasonable.
Make customers aware of these terms before they order, when you provide a quote and when an invoice is at risk of becoming overdue. Your invoice should also include details on how to pay you, such as your bank account or online payment information.
Get it in writing.
For large or regular transactions consider getting a specific contract drawn up and signed by both parties. At the very least ensure the main points of the order or transaction are in writing with evidence that it has been agreed by each party.
If you ever end up having to consider legal action, good record keeping will pay dividends.
Everything from the original order, proof of delivery and late payment chases should be kept. Your solicitor will want written evidence and a chronology of events to proceed with a claim, so keep copies of any emails and notes of any telephone calls.
What to do when a client doesn't pay?
Implementing the above tips may help in reducing the chances and impact of late paying business customers. But even with the most vigilant owner, on-the-ball accounts team and strictest terms and conditions, you will still encounter customers that simply choose not to pay.
So your next step is to consider formal legal action to recover the amount owed, which usually starts with sending a Debt Recovery Letter Before Action.
Having robust Terms & Conditions, a consistent approach to invoicing, and a clear paper trail will help you get what's owed to you that much quicker and assist your legal claim should you ever need to get a solicitor involved.
Whether you are a business or an individual, when money is owed to you there's usually a clear deadline specified for when payment is expected to be made. For example, your business invoices will have a payment period detailed on them, and if you've loaned money to a friend then you will have an agreed repayment date or schedule.
But if this date passes and no payment has been forthcoming, can you claim interest on the money owed to you?
Can I charge interest on money owed?
Your legal right to charge interest on an outstanding debt depends on a few factors which we'll cover in this guide. These include:
Interest on business debts.
The ability to charge interest on an overdue invoice or order will depend on the status of your customer and the contractual terms you have agreed that deal with any late payment. If you have a contract in place that contains a provision or clause for interest to be charged, then this should be sufficient to add interest to the overdue amount at the agreed rate.
If there is no specific contract in place with your customer that dictates interest charges, you may still be able to claim interest via legislation known as the Late Payment of Commercial Debts (Interest) Act 1998 if your customer is also a business (limited company, sole trader etc.).
Late payment of commercial debts.
This late payment legislation permits you to charge 8% interest plus the Bank of England base rate on overdue debts owed by your business customers (B2B). You can begin charging interest as soon as payment becomes overdue, and if no payment date was documented or agreed payment is classed as late 30 days from the customer receiving your invoice or delivery of the service/product.
There are some exceptions and additional items that can be claimed as part of this legislation, so please read our full guide on claiming interest on unpaid invoices. Alternatively you may wish to instruct business debt recovery solicitors who will be able to calculate your late payment interest and compensation entitlement on your behalf.
Business to consumer debts.
If the customer whose payment is overdue is an individual and not a business, there is no statutory right to charge interest on the amount. So, unless you have an agreed contract or terms of business in place that specifies additional charges will be made in the event of late payment, no interest is able to be added to the debt until court proceedings are started.
When dealing with debts incurred by consumers (and sole-traders) it is also important to comply with the Pre-Action Protocol for Debt Claims. Failure to do so before commencing court proceedings may result in sanctions being imposed on you, likely in relation to court costs.
Quick Reference - Interest on Debt Claims
* Based on statutory annual interest entitlement and the base rate, details correct as at December 2020.
Interest on personal debts.
If you are owed money as an individual such as through a private sale, shared bills or a personal loan, there is no entitlement to claim interest on the debt unless you have a signed contract or agreement that permits it.
For example, in the case of lending money ideally you will have documented the arrangement in a loan agreement which should have a provision for any interest and what occurs in the event of the borrower defaulting on their repayments.
Without a written contract interest is not able to be added to a personal debt prior to court proceedings being started.
Interest on court claims.
Regardless of the status of the debtor and the absence of a right to contractual interest, if you get to the stage of issuing a court claim to recover the debt, interest will often be able to be added to the amount owed.
Section 69 of the County Courts Act 1984 permits interest to be added to most non-commercial debts at the rate of 8% per year. This is a statutory interest rate and you can usually claim it from the date the debt was due up to the date you issue the claim.
At the point of issuing court proceedings, other court fees and costs can also be added to the amount that is being claimed. However note that as with any other element of a claim, interest is awarded at the discretion of the court.
The applicable interest is just one of the items that needs to be considered and calculated as part of a court claim for a debt. Therefore, it is always advisable to seek early legal advice if you are contemplating pursuing a substantial debt.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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