One major cause of headaches, for both businesses and individuals, is when customers, clients, or others refuse to pay money they owe. Despite letters and phone calls they may fail to meet their financial obligations and can leave their creditors feeling frustrated and out of pocket. For many small businesses, this can make the difference between their business surviving or going under.
Small businesses should keep asking themselves these questions:
- Has the debtor got means to pay?
- Is there likely to be a dispute about the amount of the debt?
- Does the debtor have assets in the UK?
Consider each of these points further.
Knowing who you are dealing with can provide confidence and comfort in your business dealings. If you do not know exactly who you’re trading with, it is difficult to establish whether credit should be offered and may create problems when it comes to commencing legal proceedings. Small businesses should make sure they know the exact name and trading style of the business. The company may trade under a different name from the people or company who own the business.
There are also different types of businesses which include, amongst others, limited companies, partnerships and sole traders. It’s important to understand which type of business you are dealing with. If it’s not a limited company businesses should check the name(s) and personal address(es) of the owner or partners. It may be essential if things don’t go to plan down the line. Perhaps you will have seen headed paper and/or some company documentation that verifies the information which they have provided to you. It’s also possible to use a credit reference agency to check details and credit status. Businesses should also ask whether the information obtained supports the amount of credit requested. Another check is to take references from other suppliers of the businesses – and ask yourself too, if they were previously dealing with your competitor, are you happy about their reasons for coming to you?
When it comes to payment terms, it’s essential to discuss and agree these with customers before accepting an order. If payment fails to arrive for goods or services which you have provided, your cash flow may be under undue pressure. Cash flow keeps businesses in business and – if you think you are being paid on one date and your customer has a different date in mind – problems could arise, especially if you’re banking on that money for other transactions. Making assumptions is dangerous.
Agreeing payment terms, formally, in advance is vital for healthy cash flow. It’s always worth confirming the agreed payment terms in writing before you accept an order and having standard payment terms in place and a policy within your organisation saying that they cannot be changed unless properly authorised. Don’t forget to review this policy annually and if others are allowed to agree terms, do they know about and always follow the policy?
Small businesses should also make sure the payment due date is clearly shown on all invoices and have a process in place for dealing with requests from customers who request a longer period to pay the invoice. Your invoice wording should also stipulate your right to make late payment and interest charges on late payments – you can always decide not to charge these if you don’t want to and make a virtue of that with your customer.
In summary, best practice is:
- Check out the exact name and legal status of the business you’re dealing with. If the entity you’re dealing with is a sole trader or partnership, the proprietor or partners are personally liable so make sure you have their full details correctly noted down. Businesses can disappear much faster and easier than individuals. If you need any further information for limited companies you can obtain information and documents at: https://www.gov.uk/get-information-about-a-company
- Don’t be afraid to ask for all the information you need – if you can’t get it now, it will certainly be harder further down the line.
- Invest in credit reference information – it could save you a bad debt.
- Set out and agree all the payment terms in advance and in writing. It’s better to know what to expect than to leave things to chance and wonder why the money hasn’t arrived.
- Whenever you write about payment terms, and on your invoices, include the words: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms.’’ Even if you don’t exercise that right, it can be a useful deterrent against late payment.
- Set some rules that your business will always follow. Don’t be tempted to go against the rules you set, even if you’re put under pressure to supply goods or services urgently.
- When your debt becomes overdue, make a call to the person who’s due to pay with a polite query. Most likely, it’s just been overlooked but if there’s any problem, this will give an opportunity for it to be resolved at an early stage.
- If the debt still isn’t paid, send out a letter before action. In most cases a letter before action can help to clear up a dispute without the need for the case to be taken to court, which most debtors will want to avoid.
- If still no success, it is worth raising a complaint with the Small Business Commissioner, appointed by the Government to tackle poor payment practice. He can use (or threaten to use) his ‘name and shame’ powers to pressure a large business to pay up. You can raise a complaint here: https://www.smallbusinesscommissioner.gov.uk/