Insolvency practitioner John Harlow discusses the late payment plight of small businesses and addressing this with a consistent approach coupled with strict adherence to the agreed credit terms.
As Insolvency Practitioners (IPs) we are privileged in that, unlike most businesses, we rarely need to get involved with either credit control or debt collection for our own bills of cost. This is because once we have obtained authority for our fees from the creditors, so long as there is money in the case, we are able to raise an invoice and pay it straight away.
Not for us the sending of a bill of costs and then an agonising wait for the payment to arrive. Not for us the awkward letters or calls to clients asking why payment hasn’t been received and feeling obliged to accept a plethora of poor excuses for the “oversight” or worse still, threats to take their business elsewhere for unwarranted bullying! Not for us either, the additional insult of having to pay the taxman his share before we have received the money from the debtor.
Of course, we do face the problem that until a case has funds in it, no fee can be drawn and this can run to many months or even years. No interim payments to assist cash flow are possible and it is by no means unknown for nothing to be realised in a case, which means that no payment can be made despite hours of work having been put in. That, I guess, is the risk we take whenever we accept an appointment and it is always open to us to turn-down an instruction or obtain a suitable indemnity from stakeholders.
But what about others less fortunate? It has been said many times that cash is king and nowhere is this more important than in the small business market. It is not new news that late payments are creating havoc in the smaller firms within all industries, or that the main culprits always seem to be the larger companies. Efforts to concentrate debtors’ minds by imposing late payment interest in terms and conditions doesn’t appear to have had a material effect and late payment is still causing cash flow problems in small businesses, in some cases being instrumental to failure and liquidation.
As IPs one of our tasks is to collect-in the book debts of a company in liquidation, or indeed of a bankrupt sole-trader or partnership. It seems that as soon as a business becomes subject to formal insolvency proceedings, it is viewed as “fair game” to debtors. It appears that the overall view is that the IP won’t expend too much energy pursuing debts. I suspect some even harbour the belief that an IP won’t pursue anything under a certain de minimis value. Nothing could be further from the truth – if the claim is good, we’ll have a go.
Of course, IPs get the usual excuses from debtors. The goods weren’t delivered, or were late, or were sub-standard. It’s amazing how often invoices or proofs of delivery were never received by the customer. Sometimes of course there are legitimate grouses, but the IP has to be certain that the reasons given for non payment are true and not just a delaying tactic. Luckily, IPs don’t have to worry too much about upsetting customers or losing trade and tend to issue proceedings quite quickly. The threat of Court action can expedite payment very effectively.
Outside of the insolvency world however, businesses in general may have to tread a bit more carefully as, rightly or wrongly, customers often take umbrage on receipt of a demand for payment and there is always the threat that they will take their business elsewhere.
This is where debt management is so important. If a business sets out from the word go adhering to credit terms, then customers will usually recognise and respect this. A laissez-faire attitude to collection by a creditor is likely to be taken advantage of by the debtor. If the creditor then comes-on strong, it will inevitably create difficulties with that business relationship. This can of course be a problem with the large companies who are frequently the worst offenders, especially as they have deep pockets and are likely to come out on top in any protracted dispute.
Nevertheless, a consistent approach coupled with strict adherence to the agreed credit terms will help. Late payments should be tackled straight away and early contact to establish if there are any problems with the contract is advisable. Businesses should also consider offering incentives such as discounts for early or prompt receipt or direct debit payments.
New businesses should endeavour to be rigorous, fair and consistent in their approach to credit control, so there’s a solid starting point. They shouldn’t be afraid to use a big stick approach on persistent late or non-payers; after all, is a customer or client who doesn’t pay really worth having?
John Harlow is the founder of Harlow Insolvency & Corporate Recovery.
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