There are various points you should consider before “going legal”. Some of these should be considered before you give instructions to a solicitor to warn the customer by letter that court proceedings will be started unless they pay the debt within a specific deadline, i.e. 7 days.
Things to consider before “Going Legal”:
1. Be Sensible
The court’s overriding object in every case is to deal with the case justly. So, before sending a Letter Before Action (LBA) or starting an action, you need to do everything a sensible person would to make sure:
•the customer knows exactly what you are claiming.
•you have dealt, as far as possible with any queries or disputes raised by the customer.
•you have given the customer a reasonable time to respond to your answers to its queries.
•you have done everything reasonably possible to avoid going to court.
•But that’s the aim of a good credit control procedure anyway!
2. Record Promises To Pay In Writing
Make sure any promises to pay the debt are recorded in writing (email is fine). Preferably get the customer to put them in writing to you. If the customer does not put their offer in writing, write to them yourself confirming what was discussed and agreed between you and them.
3. Commercial Considerations
•What is the most appropriate way of dealing with this customer?
•Will you upset them with further action? Do you mind upsetting them?
•What is the commercial position?
•Do you want to deal with them again?
4. Know What It Costs
You need to know the cost of the steps you are taking. Make sure you are familiar with the potential Legal Costs of taking legal action.
5. Cost/Benefit – Is It Worth It?
You need to be satisfied that the cost of taking proceedings, and possible enforcement, is worth the risk.
•Is it a case where the customer “won’t” pay rather than “can’t” pay? You may want to carry out credit checks before risking the costs. For example, are there any unsatisfied County Court Judgements CCJ’s?
•If you are doubtful about a customer, you can instruct a solicitor to check if there are any current winding up petitions i.e. petitions which have been presented but where no winding up order has yet been made. These will not be revealed by the normal credit searches. A small charge for this service is normally made.
•Have you spoken to the customer recently?
•Have you checked that your customer is still there? I.e. the owner of a restaurant may have sold it and left but the new owner will still be trading under the same restaurant name.
•You need to consider the case as a whole right at the beginning. You must be aware from the outset of the potential costs of taking proceedings and of possible abortive enforcement.
•There is no “right answer” as to when to pursue a customer and when to give up (unless the customer is insolvent). You have to test things for your market and customers to find the right balance. One thing is for sure. If you don’t try and collect the money, you won’t get paid!
6. You Know Your Customer Better Than Anyone.
Credit reports can tell you something but the data is fairly historic. Your company has recently dealt with the customer and will have as good a “feel” as any for the customer.
Prevention is of course better than cure when it comes to late payments and bad debts in a business of any size and that means having robust terms and conditions in place to offer legal protection if a customer fails to pay when due. But Terms & Conditions aren’t worth the paper they are written on if the terms are not enforced and sadly this is proving to be the case amongst many SMEs through fear of alienating customers.
In fact we’ve found that 58% of small to medium sized businesses wouldn’t claim compensation for fear of damaging customer relationships. This is despite the fact that almost 1 in 4 businesses are being paid, on average, one to two months late. Furthermore, 60% wouldn’t make any claims from ex-customers because it would affect their reputation.
While the Government has plans to create a dispute resolution service to help tackle late payment to small businesses, in many cases there’s no dispute to be resolved, it’s simply one business failing to pay another in order to protect their own cash reserves.
Claim What Is Rightfully Yours
So what’s to be done? Well, in our experience, the fear of upsetting customers or creating a bad reputation are unfounded. Businesses need to take a stand and claim what is rightfully theirs. It’s not difficult and doesn’t need to be costly. Indeed there are regulations now in place that can effectively make debt recovery cost free! So there really is very little to lose from taking action, whether it’s instructing a Letter Before Action to be issued (at the cost of a “very cheap” cup of coffee) to claiming late payment compensation.
Take Action With Late Payment Compensation
The Late Payment act allows any business paid late to claim interest for the period the debt was overdue, plus compensation, if their contract terms allow it. The entitlement to claim interest and compensation remains for six years on each and every invoice (or payment point) paid late, unless clear assent is proven against the claimant. That means you can recover compensation of between £40-£100 per invoice, plus reasonable costs on any debts, which are now paid, but were paid late over the previous six years.
A lot of this comes down to the terms and conditions which form the basis for the relationship – if it’s made clear from the outset that compensation will be claimed if payments are overdue, then there’s no surprises and in fact, it can often incentivise customers to pay within terms to avoid the additional cost. This is the best way to get a grip on the bad debt culture that is so pervasive in the UK today.
The legal right many UK businesses have to claim late payment compensation is being stymied by a fear amongst firms that doing so will upset their customers and lead to loss of business.
A recent survey of credit personnel* within small to medium sized businesses by Lovetts has found that 58% would not claim late payment compensation for this reason. This is despite the fact that almost 1 in 4 businesses are being paid on average 1-2 months late.
The survey found that only 22% get their bills paid within terms, 49% are paid within the following month while 23% have to wait 1-2 months after the payment due date.
Cost is not a barrier to taking action, the survey found that less than 5% of firms are put off by the cost. Furthermore, 20% don’t think it would be worth the bother and 18% of the businesses surveyed think it would take too much time.
As such 48% never claim compensation, leaving just 20% that said they do. Surprisingly, when asked about claiming compensation from ex-customers, which businesses are able to do going back 6 years if their terms and conditions allow it, almost 60% said they wouldn’t because it would affect their reputation.
The perception that action will lead to loss of custom is actually quite far removed from the reality in our experience and as such, it is a real concern that so many businesses live in fear of upsetting their customers by claiming what is rightfully theirs. A lot of this comes down to the terms and conditions which form the basis for the relationship – if it’s made clear from the outset that late payment compensation will be claimed if payments are overdue, then there’s no surprises and in fact, it can often incentivise customers to pay within terms to avoid the additional cost. We would really urge credit professionals to reconsider this highly cautious attitude to help get a grip on the late payment culture that is so pervasive in the UK today.
Philip King, Chief Executive of the Chartered Institute of Credit Management said: “Our CICM UK Credit Managers’ Index is showing demand for credit is largely on the up. This adds to the wider picture of an improving economy and greater trading confidence amongst UK businesses. However, it is important that firms taking on new customers, extending credit, and expanding their order books have robust terms and conditions in place that will protect them should bad debt become an issue. It is also important that they use all of the tools at their disposal including late payment legislation, best-practice credit management, and the Prompt Payment Code (PPC). Preserving good customer relations is important but so is preserving the future of your business.”
* Survey of 149 Credit Professionals, September 2015
Our client is a major company which deals in shares. They had a debt in China for just over £4,000 which they instructed Lovetts’ overseas prelegal department to recover on a no collection, no fee basis.
The Challenge
The debt was for services our client had provided in respect of dealing with shares and issuing share certificates for their client, a Chinese company. The debtor refused to engage with the client in relation to the unpaid invoices. The Courts of England and Wales had jurisdiction but even if Court proceedings were issued and a Judgment obtained China would not recognise it as an enforceable Judgment, because China only recognises foreign judgments under specific treaties with particular jurisdictions. China has not entered into such a treaty with the UK.
The Solution
It was important to establish some engagement in relation to the debt. The key to any debt collection, whether in the UK or overseas, is to ensure you speak to the right person even if you have to escalate it as far up as the CEO. The debtor failed to engage with Lovetts and it was not possible to make contact with anyone with sufficient authority within the debtor Company. Through extensive research and investigation, Lovetts was able to find the details of the debtor’s third party accountants and subsequently made contact with them regarding the debt.
The Benefit
The accountants would have been under a duty to refer our correspondence onto its client, our debtor. They would also at the same time be made aware of a potential liability that would have to be accounted for in any accounts drafted by them. The accounts did in fact refer to our correspondence and they also made a senior member of the debtor Company aware of the debt. Accordingly, the debtor settled the debt within two weeks of the debt being referred to Lovetts and all on a no collection no fee basis. International Debt Recovery: send us a message or call 01483 457500
“A mediation service will only support a fraction of the small businesses struggling with late payment”, says Charles Wilson, Chairman of Lovetts, the debt recovery law firm. “The Small Business Commissioner should focus instead on helping businesses lay down the law when it comes to payment delays, only in this way will the culture of late payment be tackled”.
Responding to confirmation that the role of a Small Business Commissioner will form part of the new Enterprise Bill, Charles Wilson says: “Just 1% of the debts coming to us for legal intervention are disputed so while this measure, first announced in May, is a step in the right direction, it is not going to change the behaviour of habitual late payers.
“Whoever takes the role of Small Business Commissioner needs to help small businesses to use the tools and late payment law already available to them to claim compensation and interest. A Letter Before Action which can be issued for as little as little as £1.50 works in 84% of cases and under the Late Payment law, businesses can make claims for debts going back six years. We have just helped a physiotherapist in a typical David and Goliath scenario, claim £41,000 in unpaid invoices, late payment interest and compensation.
“The law is there, businesses just need guidance on how they can use it and more realistic recoverable legal costs would further discourage late payers from risking court claims, and encourage the new culture that business so badly needs.”
“Cut to the chase” urges Lovetts, in response to latest initiative to stamp out late payment
For roughly the cost of a coffee or daily newspaper, firms struggling with late payment can instruct a solicitor to issue a Letter Before Action and have an 84% chance of being paid according to new data from Lovetts, the commercial debt recovery law firm.
Responding to the invoice financing reforms, which may only benefit a small number of businesses, Lovetts is urging firms struggling with cash flow to use the low cost tools already available to them to tackle late payment at an early stage.
A Letter Before Action (LBA) is a formal letter which sets out what is owed and gives the customer a set time period in which to pay. A new service from Lovetts means clients can opt to issue an email LBA for as little as £1.50 plus VAT, putting the demand for payment straight into a company’s inbox. There is no minimum spend or commitment, making this a practical and cost-effective solution for SMEs.
Lovetts has analysed the success rate of the Letters Before Action it has issued on behalf of Clients over the past year and found that 84%* of cases settle at the letter before action stage. Despite this, businesses are still slow to take action against late payers. Lovetts has found that on average, businesses are waiting 64 days from the date the invoice is due before sending a letter before action.
Michael Higgins, MD of Lovetts said: “Any initiatives to cut red tape such as the ban on anti-invoice finance terms in contracts should be welcomed. However, invoice financing is not always right for many businesses and those that will benefit need to wait until next year before the reforms become effective. The fact is there are positive, low cost steps businesses can take right now to improve their cashflow when dealing with late paying customers. Email LBAs start at just £1.50 for example. With an 84% success rate it’s worth a punt”.
“In some cases we have found that debtors intentionally wait until they receive a Solicitors letter before they make payment therefore, taking action quicker is vital to cashflow. While we understand the reluctance some firms may have enlisting the services of a solicitor and how this might be perceived by their customers, in the 22 years we have been in business, we are not aware of any client who has lost a customer by taking this action.”
*Update: As of 2016 the percentage of debts paid at the letter stage has increased to 86%.
Letter Before Action Explained by Paige Carpenter
Read more about LBAs here.
Making It More Expensive For Customers To Pay Late Confidence Boosted By Ability To Recover Costs
More businesses are taking matters into their own hands when it comes to tackling late payment rather than wait for Government intervention according to new analysis by Lovetts, the commercial debt recovery law firm. Confidence to take a stand against poor paying customers seems to be growing as Lovetts has seen a gradual but encouraging rise in the number of businesses using legislation to claim compensation and interest from their customers for overdue invoices. In 2005 just 1% of Lovetts clients were claiming compensation, now the proportion has risen to 24%. The need for payment appears to be overcoming the fear of damaging client relationships.
The Late Payment of Commercial Debts (Interest) Act 1998 has, for a number of years been a significant remedy for companies where customers pay late. Unfortunately not many companies have been aware of this. However, the 2013 regulations has now allowed companies to recover reasonable debt recovery costs where the fixed sum compensation under the act does not sufficiently cover debt recovery costs. This has made the act significantly more appealing to UK companies since 2013.
Charles Wilson, CEO of Lovetts said: “More customers are issuing Late Payment Demands which show the late payment compensation and interest on the debt at the pre-action stage. This makes it very clear to the customer the costs they will face in addition to the debt if they don’t pay up. These aren’t empty threats – we are now being instructed to pursue compensation and interest on almost 1 in 4 claims to recover debt. What businesses need to understand is that the entitlement to claim interest and compensation remains for six years on each and every invoice paid late, unless clear assent is proven against the claimant. That means you can recover compensation of between £40-£100 per invoice plus reasonable costs on any debts which are now paid, but were paid late over the previous six years.
“Few businesses are aware of this six year rule but a small but growing number of firms are utilising the Act to take on late payers, past and present, recovering significant sums to compensate them for the administrative and legal costs they have incurred.”
Lovetts Responds To Business Secretary’s Proposals
Secretary of State for Business Sajid Javid has today confirmed the creation of a Small Business Conciliation Service to help settle disputes between small and large businesses, especially over late payment practices. This will form part of the government’s new Enterprise Bill. Charles Wilson, CEO of Lovetts the commercial debt recovery legal firm welcomes the move but fears the service will help only a small proportion of firms struggling with late payment of their invoices.
Charles Wilson says: “Just 1% of the debts coming to us for legal intervention are disputed so while this measure is a step in the right direction, it is not really addressing the problem.
“Javid needs to focus his efforts on persuading late paying businesses that it is in their economic interests to pay on time. Late payers rely on the reluctance of their suppliers to take firm action against them – Javid has acknowledged this. The government needs to help small businesses to use the tools and late payment law already available to them to claim compensation and interest. Under the Late Payment law, they can make claims for debts going back six years. In addition, more realistic recoverable legal costs would further discourage late payers from risking court claims, and encourage the new culture that business so badly needs.
“Both these measures will send a strong message to habitual late payers that it doesn’t pay to delay. If more big businesses were aware of the legal claim their suppliers have to interest, costs and compensation I believe there would be a major change in late payment practices in the UK.”
Access to Justice for SMEs across the UK was dealt a hard blow in recent weeks. Following a Government consultation last year, in March 2015, a new Court Fee tariff was introduced. As a result, the Court Fees for money claims to recover overdue debt from businesses rose in some cases by a staggering 622%.
The biggest concern is the impact it will have on money claims worth £10,000 or more where the court fee is 5%. Although most commercial debts are smaller than this, the impact of debts of this size, or greater, can be significant. The fear is that this huge increase in Court Fees will result in firms simply writing off the bad debt. But you do not have to do this, there are other options.
For larger debts, businesses may be tempted to go straight into insolvency proceedings to recover their money, as a more cost-effective solution than issuing a County Court claim. For example, an overdue debt of around £50,000 involves a court fee of only £280, whereas a court claim fee would now be £2,500.
Insolvency petitions cannot, however, always be used, so it has therefore become even more crucial that firms seek professional advice on mitigating the risk of bad debt at an early stage. Simple, cost-effective solutions such as a Letter Before Action (LBA) or Late Payment Demand threatening legal action should be explored as 8 times out of 10 this will elicit the desired response from the customer.
Lovetts has recently launched an email LBA at a mere £1.50, cutting the cost even further for SMEs.
Time From Invoice To Letter Before Action Increases 24% Year On Year
New figures on the amount of debt UK businesses are dealing with through late payment of their invoices throw into sharp relief the huge scale of the issue. With respected industry bodies such as The FSB and IoD calling for action, the new figures from Lovetts, the commercial debt recovery law firm, reveal suppliers are bank rolling their customers for an average of 103 days from the point they issue an invoice, before they threaten legal action with a Letter Before Action (LBA). This is a 24% increase on the amount of time the same sample waited in Q1 2014 when the time from invoice to LBA was 83 days.
From our figures, the scale of the late payment scandal in the UK is getting worse not better, despite the high profile campaigns to stamp out the problem. As the business climate improves, it seems that British businesses are reluctant to rock delicate client relationships by threatening legal action but their invoices will simply end up at the bottom of the pile. It’s vital that businesses act early on overdue invoices rather than delay. They also need to claim their right to compensation – not just for current customers but past customers who paid late too. It’s the only way the battle against habitual late payers can be won.
The Late Payment act allows any business paid late to claim interest for the period the debt was overdue, plus compensation. The entitlement to claim interest and compensation remains for six years on each and every invoice paid late, unless clear assent is proven against the claimant.
A growing number of businesses are now utilising the act to take on late payers, past and present and recovering significant sums to compensate them for the administrative and legal costs they have incurred chasing late payment. We want more companies to take action in this way – it will send a very clear message to late payers that delaying payment to their suppliers can seriously damage their bottom line.