With late payment being such a big issue, you need to do all you can to make sure your customers take you seriously and pay you on time.
Here’s a 12-Step action plan for small businesses to put the ground rules in place to help prevent late payment, as well as the tools and tips for recovering debts when customers fail to pay up;
1. Set clear expectations with customers
First, make sure your customers know you WANT to get paid on time. State your Terms and Conditions clearly, include how any overdue payments will be dealt with.
State that the full cost of any debt recovery activity necessary to secure overdue payments will be added to the invoice.
2. Ensure invoices are received
Too many companies give wrong signals, by failing to check that invoices have arrived safely and are on their customers’ ledgers. Send an invoice by email to your contact and to the accounts payable department at the same time.
3. Make it clear you will take legal action
Tell customers early on, as part of good relationships, that legal action WILL be taken against non-payers. It doesn’t need to get personal at this stage, just clear.
4. Summarise the potential costs of non-payment
ADD UP the costs of going legal early on i.e. interest, late payment compensation, indemnity costs under contract (make sure your T&Cs allow for this). TELL the customer what that figure is.
Explain your reluctance to escalate costs unnecessarily.
5. Send a ‘Late Payment Demand’ if you aren’t paid on time
If you have not received payment by the date the invoice falls due, you should issue a “Late Payment Demand” (LPD).
Late Payment Demands (LPD) show the late payment compensation and interest on the debt at the pre-action stage. This makes it clear to the customer the costs they will face, in addition to the debt, if they don’t pay up.
The LPD is sent by a solicitor and makes it clear that they have been instructed to pursue compensation and interest on the debt. In 80% of cases an LPD can elicit a response or payment.
6. Follow up with a ‘Letter Before Action’
If payment is still not received, the next step is to issue a Letter Before Action (LBA).
An LBA is the last resort before taking a claim to court. It sends a strong message to late payers and gives them one last chance to settle their debt.
It should state the amount and include any compensation and interest to be claimed. It should also have a date to indicate when the debt needs to be paid.
And finally, it should offer a reminder that you will start court proceedings if they don’t reply, which could incur extra costs.
7. Consider a draft Winding-Up demand for larger debts
Use a draft Winding-Up demand for debts against companies, not just a letter!
If you are worried about their financial stability, and need to move fast, consider investing in a letter enclosing a draft Winding-Up petition. It makes maximum impact straightaway. It carries the risk of public advertisement.
8. Phone the debtor
Make a telephone call before you issue a Claim to remind them of the escalating costs that will result in court proceedings.
9. Ensure your Claim includes all costs and compensation
Make sure you tell your legal representatives to include your contractual costs, compensation and interest if you are entitled to them all.
10. Enquire to see if they want to avoid Judgment
After the Claim is issued, ask the debtor if they want to pay to avoid Judgment which will hit their credit rating. Over 50% will. Make sure you get all the costs, interest and compensation above.
11. Specialist solicitors can advise on disputes
If any issues or disputes arise with your debtors, obtain fixed-fee advice from a specialist solicitor before sending an LBA.
The advice will give you a better understanding of your legal position and the strength of your case. It will also set out tactics to resolve the case and the likely costs of taking legal action before you get sucked in unnecessarily.
12. Being tough pays
Remember – being tough this time might save you the bother next time.
Businesses need to adopt a robust approach to recovering debts and that means understanding all the tools available to them. As the business climate improves, it is important that invoices are paid on time. Without a strong cash flow it can be hard for a business to reinvest and grow in the future.