Record business debt sees legal action soar

Unprecedented levels of business debt have been recorded by a debt recovery law firm, as companies increasingly resort to desperate measures to keep afloat in the downturn.

Lovetts said the total value of claims being taken through the court process by the firm on behalf of its clients in Q1 in 2009 was 97% higher than Q1 in 2008. The average claim was up by 60%.

Of these claims, the firm said 37.4% included claims for late payment interest and/or compensation, increasing from 31.6% in 2008.

In addition, Lovetts saw a 58% increase in the levels of debt being chased through Letters Before Action (LBAs), with the average value of LBAs increasing by 20% since quarter one in 2008.

LBAs are used to secure payment, or to obtain a response from a customer before the commencement of a legal claim.

Lovetts said the findings indicated the extent to which businesses have become more risk averse in the current economic climate, taking action much sooner on arrears than previously.

Earlier this month, Lovetts noted that businesses were “going legal” 39 days sooner than a year ago on unpaid invoices.

Commenting on the findings, Charles Wilson, chairman and managing director of Lovetts said: “The previous attitude towards frequent late payers may have been accepting and forgiving but the current tough climate is pushing businesses to press for payment on time in order to protect themselves.”

He added: “In this economic climate businesses need to ensure they are tackling late payment and bad debt head on. For small businesses in particular it can be a matter of survival or failure.”