A practical guide to reducing bad debts

How effective is your credit control? To what extent do you rely on your client or customer’s promise to settle an invoice, and apply leniency to your credit control terms as a gesture of goodwill for far longer than you should, which in turn may affect your cash flow? Are your bad debts in control?

Effective debt recovery is key. If allowed to slip, it can result in serious consequences for your business. It is important to manage unpaid invoices by taking a strict approach in respect of payment terms across the entirety of your business.  We appreciate this can be sensitive particularly with long standing clients or customers, but that is why proper advice is important on the options available to you to recover unpaid monies, depending on your business needs.

payment-terms

The first key tip is to take credit control seriously and implement a clear structure across your business.

This can be done by carrying out the following three steps:

  1. Know your terms of payment. How long does the client or customer have to pay?
  2. Diarise. E.g. If an invoice is rendered and due to be settled within 28 days, diarise to review on the 29th
  3. Prepare a “friendly” template letter/email to the debtor to chase the unpaid monies, and ensure it is sent immediately upon expiry of the payment period. E.g. On the 29th day using the working example above.

The Pre-Action Protocol for Debt Claims applies to all businesses seeking to recover a debt from an individual. It does not apply to business to business debts. The Protocol encourages early communication between the parties. Whether seeking money from an individual or business, this same principle is encouraged by the Courts and so following the above three steps can only evidence good conduct and work in your favour.

If the above “friendly letter” does not result in payment, you may need to seek advice on enforcement action in respect of the debt.  It is essential to take control in order to decrease the level of bad debt.  It may be necessary to draft a Protocol-compliant “Letter Before Action” which is the final step before the issue of Court proceedings to obtain a Court Judgment against the debtor.  You should seek legal advice on the letter.  This letter can often result in payment of the debt without the need for Court proceedings.

A Court Judgment can be enforced in a number of ways:

  • If the debtor has an asset such as a property, you may be able to seek a charge over the property so that you are paid the debt together with accruing interest upon sale. You may be able to force the sale of the property depending on the circumstances.
  • You can apply to make an individual bankrupt, or wind up a company by placing it in to compulsory liquidation.
  • You can send in bailiffs to the address of the debtor to force collection of the debt. The bailiffs have the power to seize control of the debtor’s belongings to the value of the debt.
  • If the debtor is an employed individual, you can seek that the employer deducts money from the debtor’s salary to be paid directly to you by way of instalments to settle the debt.

The above is not an exhaustive list but are some of the options available to enforce an unpaid debt and reduce bad debt.  We consider that it is important to assess your business needs, and the debtor’s worth before you embark on any form of litigation. If you are unsure of your debtor’s worth, we can assist in the investigatory stages and advise on the most suitable options for you. We recognise the importance of approaching debt recovery with a commercial mind, and costs proportionality in sight at all times.

Article by Kavita Rana, published by West Essex Life – December 2019

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