Rachel McCahill, head of restructuring, turnaround and insolvency, partner, and chief training officer at Buckles Solicitors, discusses the options for small businesses when chasing payment.
Brexit, the global pandemic and the UK’s economic downturn has created a difficult trading environment that has precipitated a decline in the number of small businesses in the UK from 5.9 million in 2020 to around 5.5 million today.
Figures for 2021 showed that small business owners in the UK were owed approximately £61bn in late payments. This figure, which is increasing year-on-year, undoubtedly plays a significant role in the failure of many UK businesses and lies behind the decline in the total number of businesses.
Chasing late and unpaid invoices can drain resources. Help from specialists is usually a better option for most businesses, but choosing the right company to chase for you is key to a positive result. Not every debt recovery specialist will be right for your business.
You can pursue directly any debts yourself, and this is probably the most cost-efficient way for debts up to £10,000 through the small claims process. However, once the debt exceeds this, it makes sense to seek professional legal advice.
The different debt collection services
Businesses will often consider using the services of a debt recovery agency (DRA) to help pursue their debts when their own attempts to ‘encourage’ the customer to pay have failed.
It is important to find a service provider that offers a total recovery solution, from pre-legal through litigation to enforcement. This ensures the level of activity can be escalated smoothly to increase the chances of more money being collected whilst keeping costs under control.
It is also worth considering not just the company’s expertise, but where they are located and how they charge for their services – percentage, flat fee, etc., and of course, what they charge for their services.
When searching for a service provider, you will find many that specialise in the type of debts they recover. However, law firms will apply tactics they have learned through their experience of addressing similar issues previously for a broad range of customers.
Understanding the likely costs
It also pays to work with a business that understands that you will require a different approach to recovery, depending on the types and number of debts owing to you. If a company offers a ‘one-size-fits-all’ solution, it is unlikely they will offer flexible pricing or work with you to deliver a bespoke solution and a legal adviser may be a better choice than a DRA.
When the cost for the first letter or call is very low, it can indicate the service is based on bulk processing rather than being tailored to each debt. Before instructing the DRA, ensure you have a quote for the cost of service and go elsewhere if they will not negotiate.
Once you understand how the company recovering your debts expects to be paid, you will know how much of the recovered monies you will keep. There’s little point chasing debts unless there is a good chance you will receive enough to make it worthwhile.
No damage to customer relationships
Pursuing debts can be stressful and if you decide to take action in Court, you will need to gather all the necessary evidence, such as copy invoices, contracts, and copies of correspondence exchanged between the parties, all of which can become a resource-hungry distraction.
You should also consider that some of your customers will know each other and may discuss your business practices highlighting any hesitation to act over bad debts, which could lead to more customers testing your patience with slow payment tactics.
Outsourcing your debt recovery can help protect client relationships. Law firms in particular have experience handling all communication with clients who will understand you are just protecting your business by immediately seeking legal remedies.
Law firms have the necessary experience and skills to quickly escalate matters when required but also understand the commercial realities of the supplier/customer relationship. They can advise which debts are worth pursuing and which are not, given all the relevant circumstances.
Court is a last resort
You should exhaust all reasonable options to try to settle disputes with your customers before commencing Court action. If Court action is necessary, seek legal advice as this is now beyond the scope of a DRA with no in-house legal team.
Court is only really a sensible option when a customer refuses to engage in the debt recovery process and you know they have the funds to cover the unpaid debt. There is little point in chasing customers who cannot pay.
If your customer does not dispute the debt but payment is still unforthcoming for whatever reason, you might also consider starting insolvency proceedings, the formal and often final process taken when an organisation is no longer able to meet their financial obligations and pay their creditors.
As with many decisions concerning your business, your customers and monies owed, discussing matters at an early stage with a trusted legal adviser can save a lot of time and money in the long run. Do not write off debts, without first exploring your chances of recovery.
