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What to do when customers can’t pay or won’t pay

Can't Pay Won't Pay

A guide to Commercial Debt Collection

Do you have customers who never pay to terms, customers who wait for as long as possible before making payment or even customers who simply refuse to pay at all? If the answer to any of these questions is yes, then your cash flow, profitability and even the future viability of your business could be being affected. Even if you are managing to cope financially with these problems, the time and effort involved in chasing these types of customers is costing your business money.

This article has been written to offer advice on overcoming and avoiding the problem of customers who don’t pay.

Should you let the Judge Decide

Do you take Court action as soon as possible?

Studies show that since the start of the 2007 recession, British businesses are moving more and more quickly to issue legal proceedings against their late paying customers. There is no doubt that recovering unpaid debts through Court action is effective, however it can be expensive, and it is set to become even more expensive as dramatic increases in Court fees are introduced later this year. The cost also rises steeply if the debtor enters a defence and a solicitor is required to act on your behalf in a contested case. Apart from cost there are other important factors that should be considered, could the company already be taking steps to deal with their debts such as Administration, Trust Deed, or CVA. If so the company is already insolvent and any Court proceedings would be a waste of time and money, adding to your losses.

Issuing legal proceedings should only ever been seen as a last resort in the collection of commercial debts, not least because it will almost certainly be the end of the trading relationship with the customer.

We do recommend that a bold approach to debt collection should be taken to safeguard your business, as the consequences of late payment impact on businesses in many ways, for example in 2013 6% of redundancies were the direct result of late payment.

So let’s look at the alternatives to Court action.

Should you try to help your customer

What about a repayment plan?

If a payment is late you should always request immediate payment in full, however if the customer simply does not have the money to pay in full, you will receive nothing. Sometimes a repayment plan is the best way forward, getting paid in installments is not ideal, but it’s better than nothing. Ensure you agree a schedule of payments with the customer and get it in writing, that way if the payments are not made as agreed, you have written evidence and can prove that the debt is not disputed and that your customer has failed to repay their debt by defaulting on the agreement.

Hopefully, given the extra time the customer will make the agreed payments and be thankful for your help. The trading relationship will remain on good terms allowing you to supply the customer again should you wish to do so.

Should you apply some pressure

Is it time to instruct a debt collector?

If your efforts to collect the debt you are owed have failed and your starting to think that you will never be paid, it’s time to get assertive in your approach to the situation. Businesses of all sizes will at times look to instruct a debt recovery specialist such as Advocate. Be warned the debt collection industry has a somewhat bad reputation and there is good reason for this. Despite increased regulation over recent years, which has forced many rogue agencies to close, some debt collection companies still practice less than acceptable methods, both in their dealings with clients and debtors. You should always carry out some research to find a reputable, well-established firm, who are regulated by both the Chartered Institute of Credit Management and The Credit Services Association, the leading trade bodies in the debt recovery industry. You should also be wary if you are asked to pay upfront or membership fees, a firm that has a good success rate in recovery debts will be happy to offer at least a no collection, no fee service. A small number of the leading firms, such as Advocate also offer a free debt collection service under late payment legislation.

A debt recovery specialist will apply pressure on the debtor by demanding payment by letter, email and telephone while making it clear to the debtor the consequences of legal proceedings against their company. This is usually all that’s required and the debtor will often make settlement soon after contact commences. If they don’t pay and provided you have agreed a no collection, no fee service or a free service under late payment legislation, there is nothing for you to pay. You can choose to write of the debt or ask the debt collection agency to issue legal proceedings on your behalf, at which point you will be required to pay Court fees.

An experienced debt recovery specialist will always enquire about your trading relationship with the customer and if it’s a working relationship that you would like to preserve. A demand letter that is custom written and crafted to be specific to the customer and their situation, can often have the desired effect of early payment without further action, and therefore without damaging the prospects of continued trade.

What should you do when all else has failed

Is legal action the only option?

There comes a point when the only option left available in recovering a debt is to issue legal proceedings. The court will expect you to have taken reasonable efforts to reach an agreement with your customer before they will accept your application. You can instruct a solicitor or a debt collection agency to issue proceeding in your name and on your behalf. The Money Claim service was introduced by the Government and allows claims to be issued online. It makes the claim process simpler and costs can be restricted to the court fee as a solicitor is not required. However, we have found that debtors are more likely to raise a dispute and file a defence in online money claims.

Contested cases can be complex and the services of an experienced debt recovery solicitor are recommended to achieve a successful judgment. Alternatively, Advocate or other agencies that specialise in litigation can transfer the case to their solicitor safe in the knowledge that the case has been prepared correctly before court submission.

The debtor, who is now known as the defendant has 14 days to declare any reason they have for not paying the debt, if they accept the debt or fail to respond you can apply for a County Court Judgment. If a case is defended, you or your solicitor will have to attend the hearing. You should also consider that defended cases can be very expensive, therefore if you believe the debtor is likely to file a defence, you should decide if the amount owed is worthwhile pursuing before issuing proceedings as once started court cases can be difficult to stop. If the case is successful and you receive a Judgment the court will order the defendant to pay within a specified period. If again they fail to pay the County Court Judgment will have to be enforced by a High Court Officer or Bailiff.

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