A guide to help small firms avoid bad debts by taking preventative steps
The construction industry has a reputation for relationships built on handshakes and trust rather than on formal documentation. This can create real problems when it comes to securing payment. Small contractors and specialist subcontractors can find themselves at the mercy of larger businesses that fail to pay on time and sometimes do not pay at all.
The Federation of Small Businesses estimates that 50,000 companies a year are forced to close down as a consequence of big businesses delaying payments to them, with listed companies often the worst culprits.
The Late Payment of Commercial Debts Act 1998 was introduced more than 20 years ago to help address the problem, but it still persists. Now the government has promised to take definitive action to tackle the scourge of late payments for small businesses. Philip Hammond stated in his Spring Statement that companies may be required to publish details of the length of time a company takes to pay its invoices in their annual accounts.
Ensure you know when invoices are due, and take credit control steps in an organised way
The government has already begun recently to publish the names of companies thrown off the Prompt Payment Code, a voluntary code, under which firms pledge to pay 95% of all supplier invoices within 60 days.
The Federation of Small Businesses believes publication of poor payment practices may cause companies and boards to change their behaviour.
A solution to this problem cannot come soon enough. But while late payment is a serious problem for small businesses, not being paid at all is an even greater one.
There are, however, some practical steps that businesses can take to avoid bad debts arising.
- Know who you are trading with
Before trading with a customer, verify their identity, trading status and, ideally, their ability to pay. Consider running credit checks. Ensure that your contract is with the company placing the orders.
Establish a contact at the outset who will be responsible for payment of your invoices.
- Set your limits
Set a credit limit and stick to it. If you’ve conducted an initial credit check then you can set a limit at the start of the relationship. You can always review this.
- Establish terms and conditions of business
Relevant terms and conditions can help when invoices remain unpaid. Terms can include specific late payment terms and penalties. When pointed out to your debtor, these can act as an effective incentive to pay quickly.
Terms should be provided to the customer before the contract is entered into, and should be referred to in the contract, which should be signed wherever possible.
Terms of business can also limit liability in the transaction and provide you with security.
- Ensure your invoices are timely and accurate
Your invoices should be addressed to the correct company and state which goods and services they relate to. They should also refer to your terms and conditions and include details of how to pay.
- Enforce effective credit control
Ensure you know when invoices are due, and take credit control steps in an organised way. This is easier to manage if you have a procedure set to timescales. Telephone contact is effective: ensure you are speaking with the correct person and that they are able to authorise the payment of your invoice, or else find out who is.
- Eradicate excuses
Deal with any payment queries as soon as they arise. Resolving issues early may ensure faster payment and may also improve goodwill from your customer.
Often excuses are a tactic to delay or avoid payment. If they claim not to have received your invoice, confirm this is the only reason for non-payment and then reissue the invoice. Then call to check that this has been received. Avoid confrontation. If your customer still avoids payment, you are dealing with an excuse and not a genuine reason.
- Keep accurate records of correspondence
All correspondence, whether letter, phone or email, should be recorded. This provides an evidence trail and can help to eradicate any excuses or queries.
If recovery processes are required, the information is then clear, which makes the process quicker and more efficient. Clear information will help when drafting court papers and help with negotiations.
- Use an experienced lawyer
While there are costs to putting preventative measures in place, the costs of not doing so could threaten your livelihood and that of your employees.
Introducing a third party at collection stage can also help to preserve commercial relationships – separating the financial issues from the practicalities of an ongoing contract can provide a useful space to solve problems away from the day-to-day practicalities.
Chris Adams is a partner and solicitor in the dispute resolution team at Nelsons