TACKLING BAD DEBT

“Bad debt” – If this phrase doesn’t send a shiver down your spine then we don’t know what will. 

Fashion press have been increasingly reporting on the closure of fashion business stores across the country due to escalating costs and declining footfall. Cry. So this means your fave brand store in town may face closure like the many others. According to the Centre for Retail Research, for the 12 month period in 2013, 49 retail businesses failed resulting in 2,500 stores and 25,140 employees being affected. Scary statistics.

Cash flow is number one priority in many circumstances for a business, but especially in difficult economic ones for small to medium-sized enterprises. Unfortunately the most damaging effect that this can cause is late or non-payments, which then impacts the company’s ability to pay their suppliers and what not – I.e. a snowball effect. A company goes bust due to running out of cash, which causes stacks of unpaid or overdue invoices. Then the law is naturally on the side of the creditors which, if taken to court, can cause even more fees and valuable business relationships will deteriorate.

A mutual understanding of all the mechanisms of debt recovery can help forestall problems, and hopefully keep that cash flowing. So here are Tahir’s top tips;

Payment ProtectionäóÂ:

1. Monitor your cash flow

Ensure invoices are being paid when they become due – well before late payments hinder you meeting your own contractual obligations, let alone threaten the business.äóÂäóÂ

2. Have payment terms and late fees in writing

The preferred route is to have your own terms of business which can be attached to your invoices and which set out your payment terms. The date by which payment must be made and the consequences of late payment should be expressly stated. Failing that, reach agreement in relation to fees before issuing an invoice. The invoice, on its face, can confirm the fees are agreed, enabling a statutory demand procedure to be employed subsequently if required. In the absence of any other expressly written agreement, a supplier can also try and rely on late payment legislation. This provides a default period of 30 days by which fees are to be paid and allows you to claim interest on late payments, together with a modest charge to cover their collection.äóÂ

Any supplier owed money should consider the following steps before initiating costly legal proceedings:

1. The first step should be a conciliatory approach. Besides potentially saving the loss of a customer and keeping costs down, the law requires you to try some alternative dispute resolution processes before litigation.

2. A third party might be called in to broker a compromise between the supplier and the purchaser, particularly when there is a dispute as to whether late fees are properly due.

3. A less costly alternative to legal proceedings is the service of a statutory demand on the purchaser. Upon receipt of a statutory demand the purchaser has 21 days to make its payment, after which time you can petition for bankruptcy or liquidation, as appropriate. To be entitled to serve a statutory demand, the fees must not be in dispute.

4. Before initiating legal proceedings, determine whether your debtor is sufficiently solvent to pay you. If it isn’t, then winning in court is of no commercial benefit and your legal costs are wasted.äóÂA court judgment against a non-paying party is a significant penalty. A County Court Judgment remains on record for six years, and can hinder applications for credit, while continued non-payment allows you to seek redress through bailiffs, charges against property or earnings, or third-party orders (where the debtor is owed money by someone else).äóÂäóÂ

Nevertheless, any company would far prefer to avoid the risk and overheads of bad debt. Ultimately, choosing customers wisely (including if possible, a consideration of their payment history) is the most prudent step of all.

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