Debt Recovery – an overview
“You cannot spend your way out of recession or borrow your way out of debt.” – Daniel Hannan
Positive cash flow management is vital for all businesses.
Poor cash flow or credit control procedures can cause businesses to struggle. Day to day operations are affected, trade debtor balances increase, Days Sales Outstanding (DSO) targets slip and businesses are prevented from taking advantage of opportunities for growth through lack of working capital or ability to raise finance.
Most businesses have reasonable credit control systems but closer examination will reveal enhancements that can easily be made to improve performance. Unfortunately, customers often treat credit terms as a kind of interest free loan to fund their own working capital delaying payment as long as possible. Businesses end up with unreasonable amounts of cash tied up, with unpaid debt strangling their own cash flow.
Businesses need to examine ways to improve cash collection and improve DSO, including:
Documentation, Terms and Conditions
Clear terms should be agreed at the outset and communicated to the customer. Consider the content of an account opening form to gather customer data and, after the credit approval process, send a confirmation letter attaching the terms of trade. Think about how orders are received and acknowledged to form the contract and then ensure that invoices are delivered promptly and in accordance with the order. If you improve the customer experience they are more likely to pay on time.
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Robust Credit Control
The most efficient performing businesses have clear credit control policies and procedures but also allow some flexibility to work with customers to collect debt whilst maintaining their customer relationship. You should consider:
- Do you have a credit control system?
- Are customer disputes resolved and late payers chased promptly?
- Is performance measured and reasons for late payment identified to spot trends or problems?
If you want customers to pay more quickly consider implementing charges for late payment of invoices. For slow or late payers implementing consequences such as the charging of late payment compensation and interest can also help improve your own cash flow. These are both legislative changes that can be applied by law and used as a negotiation tool in the recovery process.
There will, unfortunately, always be a need to escalate accounts to a formal debt recovery process.
This will initially require a formal demand letter being sent to customers, setting out your outstanding account and providing specific deadlines by which you require payment or contact to discuss repayment. For commercial customers, you should allow 14 days for a customer to reply and 30 days for a consumer/sole trader (this is a legal requirement under pre-action protocols). It is advisable to send a copy invoice/statement of account with each letter, ensuring that customers are fully aware of the debt outstanding and minimising any queries.
Identify customers that are unlikely to pay as soon as possible so that recovery activity can commence. The longer debt is overdue the harder it is to collect.
If customers fail to make payment or agree to a repayment plan proposal, then you have the right to issue court proceedings through the County Court. This will involve issuing a Claim Form setting out the outstanding debt, any interest claimed and any costs incurred in issuing such proceedings. If your customer fails to respond to this, then you will be able to enter judgment and then consider enforcement action.
Enforcement action can be taken in a number of ways:
Writ of Control (Debts over £600) or Warrant of Execution (Debts less than £600 or consumer credit regulated) – instruction to a High Court Enforcement Officer or Bailiff to remove customers assets for sale at auction
Attachment of Earnings – an order requiring payment direct from employers
Charging Order – a charge on property to secure your debt
Third Party Debt Order – an order requesting payment from a third party who owes your customer money
Information Order – an order to attend court and provide details of income/expenditure
Enforcement action will be determined by what information you hold regarding your customer or what information can be obtained through external sources.
Summary of Debt Recovery
Build a relationship with a law firm experienced in both commercial and consumer debt recovery so that you can move quickly when the need to “go legal” arises. You may only need your solicitor to send an overdue customer a single letter to obtain payment. However, it is also important that your partner law firm can provide a range of legal debt recovery services and provide commercial advice on the merits of issuing legal proceedings.
Ask your external partner to carry out a review of the credit control process. Improved process and documentation will build better relationships with customers and reduce the time it takes to convert invoices into cash. Better systems for collection, recovery and legal action will improve cash flow and assist in the quest for future growth.
The legalities around debt collection through the courts are complex, use an expert partner to help ensure your systems are sound and that you can take decisive action when needed.