In this and two subsequent articles, I would like to consider steps to ensure your business has an effective debt recovery system; look at standard terms and conditions you ought to have to assist with debt recovery; give practical tips to protect your business against a debtor who appears to be in financial trouble; and consider the use of an effective Retention of Title clause ("ROT").

Effective Debt Recovery

To ensure your business gets paid for what it does you must take a Positive approach to credit control and minimise the risk of debts becoming overdue. In order to do this:-

  1. Have one person responsible for effective credit control. It is an important role and should not fall between two or more individuals.
  2. Know your customers. For example, whether they are a sole trader, a limited company, a partnership or a limited liability partnership. You should:-
    1. make sure you speak to your customers regularly and make sure you speak to them at the beginning of your relationship about payment terms;
    2. regularly research their financial status as this may change very quickly; obtain credit reports; and accounts at Companies House which will show any insolvency history; and make a search of the register of County Court Judgments;
    3. be open with your customer, speak to them regularly so problems can be identified in advance;
    4. do not be tempted to take on high risk customers without safe guards being in place: cash on delivery; performance bonds; or payments on account etc; and
    5. ensure your contracts allow you to stop work if any payments are not forthcoming.

On a practical basis if your business has commission remunerated salesmen who visit the customers, make sure that payment of their commission is dependent upon them completing a credit control sheet with all the salient details of the new customer to enable monies to be collected. Your credit control department should then follow this questionnaire up to establish a relationship with the customer otherwise the relationship is between your sales team and the customer and not the people collecting the money.

  1. Review your terms and conditions of business ("T&Cs"). Make sure they are incorporated into all contracts with the customer. You may need to seek advice upon incorporation as often this leads to a situation called the "Battle of Forms". I will touch on this in the concluding article in this series.
  2. Establish a set procedure for credit control, in accordance with your T&Cs and "stick to it". Set a credit control limit and a time for each customer to pay. The latter is likely to be covered in your standard T&Cs, but do not be afraid to shorten this period by mutual consent if you are worried about the credit worthiness of the customer. Also, be alive to the prospects of payment in instalments but make sure you record all communications with your customers. Often the consideration of a small discount on your invoices may be acceptable to you on the basis that your customers pay them on time. You must establish when chasing letter(s) will be sent and establish when a final demand will be sent.
  3. Take action:-
    1. Commence County Court proceedings.

A claim may be issued in your local County Court or online at www.moneyclaim.gov.uk.

  1. Serve a statutory demand

Upon any customer with an outstanding undisputed debt of more than £750 and this may be followed by presenting a petition to the Court to make an individual bankrupt or to wind up a company, placing it into liquidation.