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.