It’s important for all businesses to get paid for the work they do. Cash flow is the oil on which businesses run and, for small businesses especially, bad debt can quite literally make the difference between survival and going under. Our checklist will help you to collect the money you’re owed and avoid late payments. If you do end up with a problem follow our advice and, if necessary, hire a reputable debt collection agency or take legal action.
Best practice steps to avoid bad debt
There are several actions you can take at the very start of your relationship with a customer to avoid bad debt:
- Check their ability to pay you and if in doubt ask for upfront payment or a deposit to limit your risk.
- Make sure you’ve got a contract in place that will hold up in court. Take a look at our Terms and Conditions blog to find out what to include.
- If you are not paid upfront, make sure you have clear payment and cancellation terms in place and that your customers are made aware of them in advance.
- If you deliver a service, be clear about what it is that you are going to deliver and when, and for how much money.
- If you are selling a product, make sure your product description and your returns policy are both clear and accurate.
- If a customer queries or objects to paying for your goods or services in full and offers or makes a partial payment, do not accept until you have made it clear to them that it is not the full payment.
- If the payment is electronic, then immediately let them know the shortfall.
- If the payment is by cheque or in cash, then you can accept it but be clear (ideally in writing and before you cash their cheque) that you are not accepting it as their full and final payment.
How to get someone to pay you
- Send a reminder as soon as an invoice is overdue. You can set up most accountancy systems to do this for you automatically.
- Send a second reminder, approximately one week later, to remind your customer of your contract terms and conditions (assuming you have those in place). Ask them to make their payment within three or five working days, or to let you know straight away if they have a problem making the payment. If there is a problem, you can choose to let them make part payments over a period of time until the debt is paid off, but try to get them to pay something as soon as possible: this will demonstrate their intention to pay and that there is no objection or reason as to why they should not pay you, in other words that they are happy with the goods or services provided.
- If these actions fail to produce a response, then phone the person responsible for making the payment or the person who placed or received the order: you may need to phone and chase more than one person, particularly if you are dealing with a company rather than a sole trader or individual. At all stages, be sure to stay calm and remove all emotion (such as anger and bitterness) from your communications. This will give you the upper hand, particularly if you need to take legal action later on.
- If you are not sure whether your reminders are being received, then it’s a good idea to send a further reminder (together with the original invoice or copy of their order) and clear instructions as to what you expect in terms of payment and by when, to their registered office address or to their trading business address. If they are a UK business you can find their registered office address on the Companies House website. You should send this reminder by recorded delivery so that you have signed proof of receipt.
- If you have no success with the above steps then you need to raise the stakes: write a further letter clearly stating that you will take legal action if you have not heard from them within, say, five working days. You may have no intention of actually doing this, but it may be enough to make them pay up promptly.
- If you still do not receive your money, then you could consider starting legal proceedings through the small claims court (subject to the size of the debt), or hiring a solicitor or a direct public access (DPA) barrister.
Note: DPA qualified barristers are now able to take instructions directly from the public. For small businesses this means the cost of instructing a barrister is often cheaper than going to a solicitor.
- If your contract is with one person or organisation, but you delivered your goods or services to someone else, then you may have a bigger problem to deal with. Contracts are typically only enforceable between the parties mentioned in the contract. However, there may be other ways to demonstrate that a contract does exist between you and the person to whom you delivered your goods or services, particularly if they have received such goods or services before and have previously paid you for them.
- What to do if the person you were dealing with at a company has ‘disappeared’ or the business appears to have closed and you can’t get hold of anyone else: If the business is registered in the UK you can go to Companies House to find a way to get in touch with them. Again, if they are a registered company, you can look at their last set of accounts online; if they have an accountant, their name may be on the accounts so you can try contacting them for further information.
- If an individual has ‘disappeared’ or you are struggling to make contact with a business, you could consider finding a reputable debt collecting agency (possibly on a no-fee-no-win basis).
Collecting bad debt and avoiding late payments: how Business Clan can help you
If you’re struggling with bad debt and late payments, Business Clan’s accountancy and commercial teams are here to help:
- review your company’s current terms and conditions to make sure you are adequately protected and that payment terms are clear and enforceable;
- draft new terms and conditions, specifically tailored to your business requirements;
- undertake credit checks via credit reference agencies and / or Companies House searches;
- set up automatic reminders to your clients from your accountancy software package when invoices are overdue;
- draft suitably worded letters to ensure a fast response from your late payer;
- undertake credit control on your behalf;
- discuss the best course of action to avoid legal proceedings and hiring a debt collection agency as a last resort.
Delia was able to give me invaluable business advice with regards to chasing outstanding invoices when dealing with difficult clients. Her guidance was clear, concise and well informed. More importantly, it worked.
Laura Salisbury, Graphic Design
Please note that this article is for information purposes only and does not constitute legal advice. If you would like further information or to talk to one of our business advisers about collecting bad debt and avoiding late payments, please contact us.
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