Do I have to Accept a Payment Plan?

The short answer is no, but it may be in your commercial interest to accept a payment plan. Before we get into that, some context is useful. There are two kinds of payment plan most people can relate to.

1) Pre-agreed Loan: also called a finance agreement. Some loans are secured against the item acquired. Other loans are unsecured. When Ann O’nymous bought their Barrie House sprawling estate home they took out a mortgage (secured loan) setting monthly repayments and making a provision for interest. An unsecured personal loan was used to buy a Reliant Robin, and credit card debt accrued out to replace the fallen chandelier. Interest charged by the lender is not pure profit. There are elements to factor in such as business costs, regulatory fees, the lender’s own borrowing cost, and compensation for bearing risk.

2) Unintended Finance: for goods or services where full payment is expected. A loan or credit agreement is not part of the sales agreement. When Ann O’nymous instructed a landscape gardener to create an urban tropical paradise, they expected to pay on completion but were scuppered by an emergency lift repair. The landscaper agreed to accept payment over several weeks without making provisions for interest or business costs.

Buy Now Pay Later is the middle ground where the debtor agrees to pay in full by a certain date to avoid incurring a high rate of interest. Ann O’nymous purchased a satellite dish with the intent of paying in full before 39% interest was applied but missed the deadline.

Business to Business Payment Plans

For a business, the types of payment plan are similar, not identical. Finance agreements are commonplace for large purchases such as plant and machinery. Some contracts in construction or IT implementation will require instalments to be made as the project progresses, with interest being charged if in arrears on completion. Unintended finance happens with mainstream suppliers no matter how small the debt or niche the industry. In a hypothetical scenario, Woosh Wedges (WW) raised an invoice on 30-day terms for £1,100 for aerodynamic doorstops to be supplied to Crooks Corner (CC). At one day overdue WW are in effect financing CC because the £1,100 should now be in their bank account. The perception of inadvertently financing a debtor through late payment may seem harsh, but legislation states all businesses are expected to pay their debts as and when they fall due. For example, when Carillion Plc entered liquidation in 2018 it had been deemed too big to fail because of the amounts owed to lenders and suppliers. The circa. 30,000 unpaid suppliers had been financing the company as it attempted to balance wider creditor obligations.

Payment Plan V Kicking the Can

Securing a payment plan should not be the primary goal of debt collection. Unless present in the terms and conditions of sale, you the creditor are under no obligation to accept a payment plan. That’s not to say you should outright refuse to consider one. Payment plans can be a mutual compromise to preserve the trading relationship, foster goodwill and negate court proceedings. A payment plan will delay receipt of cash to your business and may have a knock-on effect with your creditors. Pre-action protocol (PAP) outlines what is expected of both parties before commencing court action. PAP stipulates actions taken and measures agreed should be reasonable and fair. No definition of reasonable and fair is given which opens every payment plan to interpretation. Whether you enlist the help of debt collection servcies or not, PAP applies. It is reasonable to agree on repayment of £1,100 over two weeks, and unreasonable over eleven weeks (9% per instalment). The longer a payment plan runs, the greater the chance of default. A good debt collector will only agree on a payment plan shorter than what the client had been offered. Some debtors will seek a lengthy or token payment plan in the hope it gets forgotten about as a peppercorn sum. The administrative cost of a payment plan is one all creditors should consider. Will the time cost in following up and chasing £100 each week be more than it is worth? If the answer is yes, then larger instalments would be reasonable and fair. What is reasonable goes both ways, for example, you couldn’t expect a debtor to pay 50% this morning and 50% this afternoon. The vast majority of written payment plans do not state what would happen in the event of missing an instalment. Verbally agreed payment plans are easily contestable and not recommended. Like all high calibre debt collection agencies, Advocate sets a caveat of court proceedings being the natural and immediate consequence of default. Payment plans remain at your discretion, not your obligation. Advocate’s experienced team have administered payment plans on behalf of clients over the years. Unlike biased debtors, we know what the courts will deem reasonable and fair! Remember, there is no guarantee a payment plan will be completed. Formal debt recovery and/or court action may still be required.

Considering the Credit Rating and Insurance

When looking at the merits and risks of a payment plan, it is useful to review the debtor’s credit rating. This can be a useful steer in what is accepted (if anything) and how long for. Let’s go back to Woosh Wedges versus Crooks Corner for a moment. If CC had a stunning £1M credit rating with no CCJs and wanted to pay £1,100 on a payment plan, alarm bells would be ringing. Either CC have suddenly got into major financial difficulty without it leaking out, or they are being an opportunist and prioritising larger creditors at the cost of WW. If CC had a zero credit rating and CCJs outstanding, it’s fair and reasonable to assume they don’t have the full £1,100. A short payment plan could be approved as an incentive to avoid fresh court action. It could also be a sign the business is about to fail. If WW had credit insurance on the debtor (insuring the debt like you would a car), the insurer or underwriter may need to give permission for a payment plan. There may also be additional caveats increasing the policy excess in event of default. The credit rating and whether the debt is insured have a bearing on what is reasonable.

Trading Through a Payment Pan

When a debt recovery firm such as Advocate is instructed, clients are expected to have already stopped supplying the debtor. Suspending the account will stop the rot and limit your exposure. Likewise, we recommend stopping supply until the payment plan is successfully concluded. Some creditors will continue supply during a payment plan for commercial reasons or the ‘big picture’ for a prestigious debtor. If you must trade through a payment then assurances and reduced credit terms are vital. Most creditors in that position will only release goods on payment of a Pro-forma invoice. Such circumstances will require sales, operations and finance to communicate effectively and in harmony. For fixed-price supply, it is relatively straightforward to manage. Where supply is measured on-site by weights, volume or time the exposure becomes unpredictable and a ‘best guess’ scenario.

Offering an Olive Branch

Before instructing a debt collection agency, some creditors will offer the olive branch of a payment plan. Sometimes this is in accordance with the terms and conditions accepted at the time of supply. More often than not payment plans fall outside the normal provisions of trading. Creditors offer it as an alternative to instructing debt collectors, knowing a shorter leash is used for third party intervention. In Woosh Wedges versus Crooks Corner, a payment plan was agreed in view of the debtor having temporary cashflow issues. CC would be cash-rich again on receipt of promised investor funds expected in two months’ time. The investment would bring more orders for those aerodynamic doorstops. The plan would see the debt cleared over eleven weeks. WW could have reasonably refused the payment plan as it took four months for CC to start communicating and would still be another two months until the last instalment. The first instalment was dutifully received before CC defaulted and WW referred the remaining £1,000 to Advocate.

Default to Debt Collectors

Once Advocate commenced action against Crooks Corner, they immediately proposed a payment plan taking thirteen weeks. This was swiftly declined on grounds of being unreasonable, unfair and being of longer duration than what Woosh Wedges had previously accepted. The CC credit rating showed a lack of liquidity and indicated assets were held in bricks and mortar as opposed to stock and cash. A CCJ can send smoke signals for potential investors to flea or demand more equity. The prospect of court action casts a long shadow and is unrelenting coming from Advocate. A payment plan of 50% this week and the balance within seven days was agreed upon and completed. The hypothetical scenario of Woosh Wedges V Crooks Corner is actually based on a real case but names and industries have been changed for confidentiality.

Eye of the Court

The County Court can and does on occasion order a defendant to make payment by instalment. Both creditor and debtor are obliged to comply. If a reasonable payment plan has been refused by the creditor outside of court, the Judge could view the claim as heavy-handed or even unnecessary. If the catalyst for court action was the debtor defaulting on a payment plan, there is little reason why a Judge would entertain another. At Advocate the vast majority of cases get resolved without needing to consider a payment plan or proceed to court. If an agreement for a payment plan is reached, the debtor is prompted ahead of time and funds forward to the client shortly after receipt. We can advise on how reasonable and fair a payment plan would be deemed and the likelihood of success, but ultimately you the client has no obligation to accept the proposal.