The Late Payment of Commercial Debts (Interest) Act provides SMEs with a negotiating tool to claim interest from business customers who pay their debts beyond the agreed payment period. It enables a small business to charge interest at 8% above the existing base rate on debts due from large businesses, public sector bodies and other small businesses.
The legislation alone cannot solve late payment problems. For the UK’s late payment culture to improve, businesses themselves must tackle it through effective credit management techniques and implementing tighter credit policies.
Many businesses implement non-smoking, health and safety and equal opportunities policies, yet don’t have a standard credit policy. Without a credit policy in place, businesses can’t realistically expect their monies to be paid punctually.
A good credit policy starts with vetting the credit worthiness of new businesses and assessing what type of client they may be – for example, a blue-chip client or a high-risk client. A decision should then be made whether to offer credit. If the decision is made to do so, a contract should be established outlining the business terms of trade.
It is vital that this document is written in plain English and understood and agreed by both parties before or at the time the deal is done. The document should include: the agreed payment period; interest payable on late payment; the supplier’s rights with regard to late payment; terms about the quality of the goods; a statement claiming ‘retention of title’ in the appropriate circumstances and a statement of how queries will be dealt with, including any appropriate time frames for raising queries.
Businesses should also have a fast, accurate and systematic collection structure that includes collection weapons such as: invoices and statements, letters (in particular with reference to interest charges), e-mails/faxes, telephone and, if necessary, personal visits. It is important to ensure that the person dealing with the collection process is empowered to speak on behalf of the business so they must have the knowledge, skills and authority to deal with any account queries or problems.
If customers won’t pay or can’t pay the business may wish to impose collection sanctions such as stopping supply, reviewing the credit limit, imposing interest, retention, use of a collection agency or legal action. However, a customer who can’t pay may have encountered a genuine situation that has impacted on their ability to pay. If a customer has a genuine problem it may be in the interest of both parties to negotiate a settlement – perhaps through a payment plan.
In some cases a customer may simply ignore requests for payment, or make endless promises which are not kept. In such situations, some final action becomes necessary and should be taken without delay.
Prior to taking legal action, it is important to ask five basic questions:
Who is the debtor?
Can you prove the claim?
Have all genuine queries been resolved?
Can you show a ‘reasonable’ approach to collection?
Is the debtor worth suing (can they pay)? If not, then the most realistic and economical action may be to write off the debt.
Through good consistent credit collection procedures late payment, or non-payment, can be minimised. The tools are there, the legislation is in place – it is now up to businesses to take control.
Twelve steps to credit management
1. Check a new customer’s credit worthiness before drawing up a contract.
2. Refuse orders if a customer has an unacceptable payment record, or obtain payment in advance.
3. Set strict credit limits and keep to them.
4. Prepare unambiguous written contracts and/or terms and conditions of trading.
5. Involve the sales force in negotiating the payment terms and ensuring that these are understood and agreed from the outset.
6. Make sure you know and comply with procedures used by your customers’ buying and accounts departments.
7. Initiate and maintain close contact with your customers, particularly with the person
responsible for paying your account. Try to create a rapport so that, even when money is tight, you are top of the list to be paid.
8. Make regular credit checks on your existing customers.
9. Ensure that all despatch notes and invoices are accurate and are delivered to the right customer at the right address at the right time. A well-trained delivery driver is able to ensure that the delivery note is signed correctly. They can also start the process of dealing with any quality and quantity issues that the customer might have.
10. Put a stop on supplies to customers who are not paying and use their desire for further supplies as a spur to payment.
11. Send regular reminders and chase payment persistently.
12. If all else fails, place the debt in the hands of a debt collection agency or a solicitor who specialises in debt collection.
