A recent client query has prompted us provide a few blogs dealing solely with late payment legislation. 

What is the Legislation?
The Late Payment of Commercial Debts (Interest) Act 1998 has been amended by European Directive 2000/35/EC. This amended legislation is in force as from 7th August 2002.
Basically the legislation, gives you as supplier, the statutory entitlement to charge interest at 8% over the Bank base lending rate as well as reasonable collection charges from a purchaser who is late in settling accounts.

The legislation was designed to reverse the bad practise of deliberate late payment, often ascribed to large companies and organisations using their power over small business although all businesses and the public sector will be able to use it.

How Will the Legislation Help You Recover Cash?
Basically the legislation provides suppliers with:
• The right to claim interest for late payment
• The right to claim reasonable recovery costs (unless you as the supplier have acted unreasonably).
The amount of compensation depends upon the amount you are due:

RECOVERABLE COSTS

Amount Due to You           Amount to Paid By Creditor
Up to £999.99                             £40
£1,000 to £9,999.99                    £70
£10,000 +                                  £100

• A right to challenge contractual terms which fail to provide a substantial remedy against late payment.
• A right for "representative bodies" to challenge grossly unfair contractual terms.

Your Terms and Conditions
Whilst the right to claim is automatic to encourage prompt payment from your purchases, to ensure you benefit from the legislation, you may wish to remind your purchasers of your entitlement to make the claim by adding the following to your terms and conditions:
“We hereby notify you of our rights in terms of the Late Payment of Commercial Debts (Interest)Act 1998 as amended to claim interest and compensation for debt recovery costs if we are not paid according to the credit terms agreed between us."

At Yuill + Kyle we automatically ask for ‘interest and collection costs’ when chasing business debts, helping to ensure we get the best possible outcome for clients.

Up to this point we’ve provided a series of blogs to help you engage in good credit control practices and avoid bad debt. 

For those in the position of trying to recover debts, we’ve suggested ways that you can start the ball rolling by carrying out certain procedures in-house. However, it may now be time to take this to the next level, which often means getting a third party involved (such as a debt collection agency or debt recovery solicitors).
Generally the ‘jumping off’ point is to submit a 'Letter Before Action' (LBA/pre-sue letter). At Yuill + Kyle Solicitors, we would send a letter to your debtor demanding payment within 7 days. After this you may want to instruct court proceedings, although there is no obligation to do so. At £3.00 + vat, with no commission on recoveries, we would advise clients that this is a low risk starting-off point.
What information is needed at the Pre-sue stage?
The information needed at the pre-sue stage is minimal. It’s normal to just ask for the client’s contact details, debtor’s contact details, the value of the debt, when it was incurred etc. You can see an example of the information needed at http://www.debtscotland.com/lettersform.cfm .  It is really only if the client wants to proceed to court action that more information such as copy invoices etc are required.

So, overall a pre-sue letter acts as a low-cost, low-risk, but often high impact spur to getting payment.

Collecting outstanding accounts should form part of a businesses credit control cycle. It is not just simply a matter of instructing third parties such as collection agencies and solicitors to undertake this task for you. Careful consideration has to be given as to how the entire collection process dovetails with your organisation's credit policy. So collection of outstanding accounts has to be planned to ensure certain types of action take place at prescribed times - usually within a monthly cycle - or sooner depending on the gravity of the situation.

The collection process can take the following route:-
• Invoice: This should be accurate detailing your customer's name and address, delivery details, order number (if applicable), details of the goods delivered and price against each item; any vat due, if applicable.
• Statement of Account This is an amalgamated summary detailing sums due by your customer at the month end taking account of all transactions which have taken place during that month.
• First Reminder Letter This should be a polite but firm reminder requiring your customer's payment within a prescribed period - usually seven days - but shorter if required. To see a Sample First Reminder Letter go to http://www.debtscotland.com/docs/firstreminderletter.doc
• First Telephone Call This should follow on from the "First Reminder Letter" requesting payment within a defined period.

Before making a telephone call to your customer you should ensure you have all the necessary information in front of you. This should include copies of invoices, statements of account, credit notes, details of any disputes (resolved), details of the person you wish to speak to along with an appropriate contact telephone number. Armed with this information you should be able to answer any query which your customer may raise quickly and intelligently.

Experience has shown that a polite approach requesting your customer's help can often include elicit a positive response. The script for such a telephone call could be as follows:-
"Good morning Mr Jones. This is Mr X from the ABC Company Limited. Are you the person responsible for payment of accounts? (On the assumption you have reached the correct person the answer to this should be the affirmative) I need your help (Hopefully this should provoke a sympathetic response - most people do respond positively to this). Your account for (£_X__ amount dated W) is overdue.
When can I expect payment?"
At this stage you should ensure you receive a positive commitment from your customer to pay at a certain date. If you have received the commitment you are looking for there should be absolutely no problem whatsoever in making the next telephone call or reminder letter.
• Consideration whether customer should be put on "stop"
• Final telephone Call This is Mr X of ABC Company Limited. I refer to our telephone conversation of ______. You said that I would be able to receive payment by (state the date). I have not received this. I really must insist that I receive payment by (state the date you require payment by).

Once again this puts you in control of the position. You will have established there is absolutely no problem with the account and that payment should have been made by a certain date and that you require payment by another date, following a broken promise. Most organisations will respond positively to these requests. If your customer still refrains from making payment it is open to you to send the final reminder letter which could ultimately lead to the matter being referred to a third party for collection should payment not be received satisfactorily.
• Final Reminder Letter This should make reference to previous communications requiring settlement by a definite date. To see an example of a Sample Second Reminder Letter go to http://www.debtscotland.com/docs/secondreminderletter.doc .  Finally to view a Sample Final Reminder Letter go to: http://www.debtscotland.com/docs/finalreminderletter.doc
• Consideration of whether to pass account to collection agency or to solicitors for legal action.

If, despite all efforts the collection process has not produced the desired cash receipt from your customer consideration should be given whether instructions should be given to a third party for this purpose.

Following on from our series on avoiding bad debt we thought we should expand on why you should talk to both your bank and HM Revenue and Custom. Later this week we'll post about HM Revenue and Customs.

Are you able to get access to increased borrowing or take advantage of invoice discounting or Factoring Services? Remember to tell HM Revenue & Customs if your customer folds as you should be able to reclaim VAT and may even be able to arrange deferral of VAT and PAYE.

Debt Factoring and Invoice Discounting
Debt factoring involves selling your invoices to a third party. In return they will process the invoices and allow you to draw loans against the money owed to your business. Essentially, these companies provide a debt collection and ledger management service.

It is commonly used by businesses to improve cashflow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies.

Invoice discounting is an alternative way of drawing money against your invoices. Here the business borrows a percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing. However, with this your business retains control over the administration of your sales ledger. As well as providing finance, it offers valuable support services and credit insurance.

Why should your customer's identity be important?

Confusion over trading names
If you contract with a limited liability company be sure you record its correct name. For example you may contract with John Smith & Brown Limited. It is perfectly permissible for John Smith & Brown Limited to have a trading name totally unrelated to its registered name. For example it could trade as "Country Catering". It is important that you identify with whom you are trading as judgement against Country Catering will be totally ineffective as that entity does not legally exist. Proper investigations should reveal the legal identity of your customer and this is an extremely important function which a business' credit control must perform accurately and expeditiously.Similarly a partnership or sole trader may trade in their own names or in a business descriptive name.

How can you assess what a customer is worth?
Remember a sale is only a sale once it has been paid for! The best way of assuring you do get paid is to assess your customer's ability to pay what is due to you within their credit limit. This is known as assessing the credit risk and once completed you will be able to assess credit terms and credit limits. Your criteria will vary depending on the assessment's result. For example you would only supply on a cash only basis if you thought your customer were shortly to proceed to insolvency. A different response will apply where your customer's liquidity ratio was improving.
Yuill + Kyle have their own credit checking website at www.ykcreditcheck.co.uk. This site utilises the largest UK credit check database to provide you with up to date reports on any UK business. The range of credit reports on offer will help you gain more insight into your customer’s credit history and risk.
How do you assess your customer's credit risk?

There are various "self help" measures you can take to evaluate the risk you are taking in supplying goods or services on credit. Amongst these are some practical measures which, if taken, should go some way to ensure you receive payment once credit has been extended. The following list, although not exhaustive, should assist:-
• Ensure your customer completes a credit account application. [To view sample credit account application visit: http://www.debtscotland.com/docs/App1(Credit%20Application).doc
• Carry out a credit check. Credit checks can be purchased from www.ykcreditcheck.co.uk. This site utilises the largest UK credit check database to provide you with up to date reports on any UK business
• Set your credit terms once you have received the report and credit application form back.
• Send a letter to your customer once the new account has been opened. To view a sample letter visit: http://www.debtscotland.com/docs/App2(Letter%20to%20customer%20re%20new%20account).doc
• Consider joining credit circles and other industry groups. Credit circles basically are closed industry groups, open to invitees of similar industries or businesses, passing confidential information amongst themselves concerning prospective customers.
• Once a credit risk has been established there should be some objective criteria within your organisation to allocate a risk category to each customer. Such risk categories can be categorised as follows:-
1. No risk - this could apply to Government departments and blue chip companies.
2. Standard trade risk - this will include all those not included in categories 1 and 3. Limited companies, partnerships and sole traders having a sound financial backing will form part of this category.
3. This will be high risk customers and could apply to, for example, customers who are always late in paying their accounts or those who have judgements registered against them.

Why should you take up bank and trade references?
It will be prudent for you to take up both bank and trade references.
Trade References
What you are attempting to do is to ascertain objective third party criteria as to your customer's worth. Much debate has taken place as to their value. Will a prospective customer really provide you with a trade reference which he considers will be unsympathetic? You should bear this in mind and if possible try to get trade references from blue chip companies if these are available. Also you should recognise your customers probably have their own important sources of supply who must be paid on time. Presumably there could be a tendency for such organisations to be offered as references rather than suppliers who are kept waiting for payment.

Bank references
Bank references provide their own difficulties with the financial institutions being quite circumspect as to what they mean when the references come through. Remember a bank reference is only an opinion and will not guarantee payment as it is based on the bank's review of their customer's account performance.

12-Step Process continued

Here are the next six steps in the UK Debt Recovery Guide 2005-06’ to avoiding the build up of bad debts. As with the other blogs so far these are all steps you can take yourself without recourse to professionals like us.

7.Initiate and maintain close contact with your customers, particularly with the person responsible for paying the account. Try to create a rapport so that, even if when the money is tight, you are at the top if the list to be paid. Remember human nature still plays a part in business decisions.

8.Make regular credit checks on your existing customers. I’ve mentioned this before and it is a source of bewilderment how many companies don’t do this.

9.Ensure that all dispatch notes and invoices are accurate, and are delivered to the right customer, at the right address at the right time. Simple enough yet it is surprising how often this is the problem causing late payment.

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 by telephone/fax/email and by visits to your customers. Time consuming maybe, but worth the effort.

12.If the above fail, place the debt in the hands of a debt collection agency like ours or a solicitor who specialises in debt collection!

12-Step Process
I’ve collated a lot of the following information from the UK Debt Recovery Guide 2005-06’. This publication is off huge benefit to the business community. 
When it comes to managing the relationship you have with your customers it highlights the need for a continuous process and a fluid mindset. Here are the first six points in this stepped process, which is advised in order to avoid the build-up of bad debts.

1.Check a new customer’s creditworthiness before drawing up a contract. We can do this for you if you are unable to yourself.

2.Refuse orders if a customer has an unacceptable payment record or obtain payments in advance. Refusing an order is often the hardest thing anyone in business can do. It goes against the grain however sometimes it is absolutely the right thing to do.

3.Set strict credit limits and stick to them. Again this is something many companies don't do. Sure they'll set them but how many stick to them and enforce them?

4.Prepare unambiguous written contracts and/or terms and conditions of trading. This is self explanatory and any legal firm can advise you on this, also often trade bodies can help too.

5.Involve the sales force in negotiating the payment terms and ensuring that these are understood and agreed from the outset. Getting 'buy=in' from the sales team makes all credit control easier, involve them in this process wherever possible.

6.Make sure you know and comply with the procedures used buy your customers’ buying and accounts departments. Not only is this good business practice it is also polite. Make it your business to find out how your customers finance department works and make sure you comply, it helps remove any potential future problems.

Shield your business from bad debt cont...

This week I’m continuing the theme on how to take your own steps to avoid bad debt.

4. Utilise the Legislation
Could you be entitled to more money? Remember you may well be able to add Interest and Collection costs to the debt. Find out more at http://www.debtscotland.com/rightclaimint2.cfm

5. Keep a tab on things
It’s a good idea to have a procedure in place for flagging up unpaid invoices. If the customer hasn’t paid, is there a reason for this? You’d be surprised just how many businesses don’t do this as a matter of course.

6. Talk to your Bank and HM Revenue and Customs.
Find out if you are able to get access to increased borrowing. Can you take advantage of invoice discounting or Factoring Services? It could be beneficial to let HM Revenues and Customs know if your customer folds as you should be able to reclaim VAT and may even be able to arrange deferral of VAT and PAYE. I’ll be expanding on this topic in the next few weeks.

Whether you’re a small trader, a multinational corporation or an international bank, you’re going to have to deal with bad debt at some point along the way. In this blog I’ll outline the first 3 steps any business can take, itself, to help minimise the chance of bad debt. Many businesses will be doing most of these already yet it never ceases to amaze me how many businesses aren’t doing all of them. I’ve 6 ‘steps’, here are the first 3 steps you can take to shield your business from bad debt. I’ll be expanding on a couple of the points in much more detail later this month.

1.Don’t put all your eggs in one basket
Be careful to avoid this situation. The last thing you want is debt from one customer putting your business in jeopardy.

2.Know your Customers
Will the customer be able to pay their bill? Carrying out credit checks are vitally important and credit limits should be set for each customer. You can purchase credit reports from www.ykcreditcheck.co.uk. This is an area I will expand on in the coming weeks.

3.Consider different payment terms
There are several different payment options you may want to explore such as cash on delivery, staged payments and discounts for prompt payments. Some companies are very rigid on this but it can be beneficial to discuss other options with customers.

I'm happy to discuss any or all of these points with you if you'd like, simply contact me via the contact us page.

Every day I speak to many businesses about recovering debt, UK debt collection is, unfortunately, a growing business.
Getting debtors to pay their bills can be difficult and time-consuming.
Unfortunately all businesses have to deal with bad debt from time to time.
However, before you come to a company like ours for help, there are a variety of ways in which you can shield your business from bad debt.
Over the next few weeks I’ll be shedding light on some of these topics.
I’ll be blogging about everything from Credit Ratings and Payment Terms to talking to your Bank and HM Revenue & Customs.
Also, I’ll take you through a 12-Step process which can help you manage the relationship you have with your customers and help you avoid the build up of bad debts. I intend to post a new blog every Tuesday and over the next few weeks we'll shine some light on the often simple steps a company can take to try and prevent incurring bad debt in the first place. All comments are welcome and I'll do my best to respond to any questions you've got.

Stephen Cowan