Every business is owed money at some point, but what do you do if the debtor decides not to pay up? Debt collection is the art of getting your invoices paid, and getting them paid on time. Kelly Henderson, a solicitor at Close Thornton, specialises in this field and has compiled this guide. It provides useful information on recovering debs, using the courts and the pitfalls of using an external debt collection agency. Cash flow is vital to small businesses and debt collection combined with good credit policy and credit control helps you to look after it.

When does a payment become late?

You can agree any credit period you want with customers - the agreement can be verbal but it should preferably be in writing.

It may be that in your industry it is custom and practice for purchasers to pay before the end of the month following the invoice month, i.e. the credit period could be up to 60 days. However, you can still set earlier payment terms by having a separate written agreement.

Where there is neither an agreement in place nor custom and practice in operation, the law sets a default period of 30 days.

This period starts from whichever of the following is later:

• the date on which the goods are delivered or the service is performed
• the date on which the customer receives notice of the amount of the debt

Purchasers cannot contract out of the late payment legislation, i.e. they cannot deny the supplier their statutory right to, for example, charge statutory interest.

Charging interest on late payments

You have a statutory right to claim interest on late payment as well as a contractual right to claim interest if your terms and conditions of payment allow.

Should I charge interest on a late payment?

You can charge interest on all late payments. However, even if you indicate in your terms and conditions that you will charge interest on all late payments, it is up to you whether you actually do so or not.

You should address each debt on a case-by-case basis and:

• consider the relationship with the customer
• get the opinion of customer-facing staff
• assess your credit management system

With persistent offenders, you may need to start charging interest to act as a deterrent in the future.

Charging debt recovery costs

As well as charging interest, under the late payment legislation you can also claim costs for the recovery of late payments.

The costs, which are fixed, are as follows:

However, before applying the charge, it is important to:

• consider the relationship with the customer
• get the opinion of customer-facing staff
• assess your credit management system
• find out what industry practice generally is

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.

Taking non-court action to collect debts

Before you take court action, you should consider the alternative methods of recovering debt outlined below.

While you consider the alternatives, you should continue trying to recover the debt using the usual methods, e.g. telephoning the debtor to remind them that the payment is now overdue.

Another alternative is to use a debt collection agency.

However, caution is required before employing the services of a debt agency as not all are reputable and charging structures vary. Potential disadvantages include:

• an agency can be very costly - the commission on the money recovered is typically 8 to 10 per cent for commercial debts, but can be as much as 25%
• you may lose the customer
• if the agency is heavy-handed, your reputation may be damaged

A better alternative is for your solicitor to issue a statutory demand threatening an application to court for the formal winding-up of the customer's business or bankruptcy if payment is not made within 21 days. It is surprising how the threat of bankruptcy or winding-up focuses the minds of debtors and results in debts being paid.

Taking court action to collect debts

Taking legal action to recover your money should be a last resort. Therefore, consider all other alternatives before going to court.

If court action still seems the best solution, consider whether making a claim is cost-effective. If a customer is likely to place large orders in future, it may be better to let matters lie if only a relatively minor amount is in dispute.

If court action still seems the best solution, make sure you have resolved any disputes over the goods or services you have provided. If you don't do this, the debt will be difficult to recover. You also need to make sure that customers have the means to settle. If your debtor is bankrupt or in liquidation, your debt is probably irrecoverable.

Services offered by Close Thornton

We have considerable experience in this area and offer a fixed fee Debt Recovery service that includes taking any necessary pre-litigation action in an effort to obtain payment of the debt without having to issue Court proceedings. This is much cheaper then going to a debt collection agency because we do not charge a percentage of the debt recovered.

The service we offer includes: -

• An initial half-hour meeting if necessary with an experienced solicitor (this can be by telephone if preferred)
• A solicitor's letter to the debtor requiring payment in full within 7 days or threatening Court action
• Follow up call / letter to you after 7 days

The fixed fee for this service is £75.00 plus VAT. We would also be happy to discuss a reduction in our fees if instructions were received to pursue more then one debtor.

If Court proceedings become necessary, we will provide a cost estimate before proceeding.

We deal with action through the County Court as well as Bankruptcy and Winding Up of Companies.

For further information contact Kelly Henderson at kelly.henderson@close-thornton.co.uk or call 01325 466461

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