Ways to help cash flow in difficult economic times
One of the main reasons for business failure during
recession is late or non payment of debts. If you are struggling to persuade
your customers to pay, there are a number of actions you can take to get them to
part with their cash.
Ways to help cash flow in difficult economic times
A major reason for company failure during these difficult
trading times is late or non payment of debts. If your customers pay very late
or not at all, this may put your business in an extremely difficult financial
position. In turn, you may need to delay payment to your suppliers and so the
problem moves on through the economy.
The following are some tips to help persuade your customers to pay their
debts.
Get your solicitor to write a letter before action (LBA)
A Letter Before Action is really a written warning to your debtor of the
action you are prepared to take if your debt is not paid. The letter will
normally imply that court proceedings will be issued and costs and interest (see
below) added to the debt. Of course, involving a solicitor will involve a cost.
However, it is a fact of life that debtors take communication from a solicitor
more seriously where they may ignore a threatening letter written simply on your
company's letter head.
Include interest in your claim
It is largely unknown that in 1998, the UK government introduced legislation
to give businesses a statutory right to claim interest from other businesses for
the late payment of commercial debt. This is known as the Late Payment of
Commercial Debts (interest) Act. If you do not already have provisions for
adding interest in your standard payment terms, you can add such under this
legislation. Your calculation of interest should be included in any letter
before action that you send to debtors.
Pursue County Court Proceedings
Depending on the size of the debt this may be cost effective. If you do
decide to instruct recovery experts, the advice is always do this sooner rather
than later. It is likely that the firm you are pursuing for payment also owes
money elsewhere. However, be mindful that if a County Court Judgement is agreed
in your favour, the debtor may choose to ignore it and continue to avoid
payment.
Threaten a winding up order
The threat of a winding up order has become much more prevalent as a debt
collection tool in the past 12-18 months. Any individual or business owed more
than GBP750 can petition for the winding up of a company. This threat has
significant teeth.
If the petition is granted by the court, this will be advertised in the
London Gazette. The advertisement will be picked up by the businesses bank. As a
result the bank is likely to freeze the company bank accounts until the petition
is either withdrawn or the winding up procedure ordered by the court. Clearly to
have a bank account frozen is a massive inconvenience for any business. With
this threat, a debtor is more likely to repay what they owe than if they were to
simply face a county court judgement.
Given the current difficult trading conditions, it is extremely likely that
you will face the late or non payment of invoices. If your business is owed
money, it is of course preferable to come to an amicable informal agreement for
this to be repaid. However, where this is not possible, it is important that you
take action to collect debts and as far as possible, protect your own business's
financial position. The best advice is to act swiftly and do not be afraid to
use the threat of court action where this is necessary.
Derek Cooper is Managing Director of Cooper Matthews Limited (http://coopermatthews.com), and a member of the Turnaround Management Association UK.
Cooper Matthews specialise in Business Recovery Services Advice and Business Refinancing, providing straight forward insolvency advice for businesses with financial problems. They have significant experience in working with small to medium sized businesses.
