With three in 10 small to medium businesses forced to write off bad debts in the last 12 months, it’s no surprise cashflow can be a major issue. Philip Gleeson at Carlisle Solicitors offers tips on how small business owners can reduce their levels of unpaid invoices
Credit management is a problem faced by all businesses, but small and medium businesses feel the pinch more acutely. Unfortunately, companies not paying their debts is something we see at Carlisle Solicitors all the time. For smaller businesses, this has a massive knock-on effect on cashflow and how the business is run. It’s frustrating for small business owners to be putting in the hard yards, only to not get paid what they’re rightly owed.
These businesses are often at their wits end trying to chase down funds owed to them. When it happens a few times, it can actually push a business to breaking point and lead them to shut down completely.
Avoiding bad debts
While sheer persistence in chasing bad debts can result in recovering some or all of the money owed, there are simple steps that businesses can take to help minimise the losses they experience over the course of a year and save time and effort along the way.
Do your due diligence
Before you sign a contract for business, do your research and find out who you are getting into business with. Companies may have a number of different trading names, so make sure the correct one is on your contract or invoice. We’ve seen companies intentionally recite an incorrect entity name on the contract, especially if they have a history of non-payment and have been through the debt recovery process before.
If you need to pursue a company legally through the Courts, it’s crucial to identify the correct entity. Failure to do so could leave you open to an order for costs. The following simple steps can be taken to mitigate any loss or confusion:
Company searches should be carried out to identify your customer. Free searches are available online at the Companies Registration Office website. These searches will help you identify the correct entity, as well as highlighting any ‘red flags’. For example, details of previous judgments may be published. If there is €20,000 of registered debt against a company, you might want to reconsider doing business with that company. They may have a history of not paying their invoices.
Request the customer’s company number and/or VAT number. These numbers can be used to identify the correct entity.
Check the company’s Privacy Notice, set out on their own website, to confirm the entity. Often a company will carry out work under a trading name. However, a company’s Privacy Notice should set out the correct legal entity.
Each of these steps take no more than five minutes but can save a company a lot of money and time further down the track.
Keep proper records
With all business agreements, written records should be kept of all agreed services and arrangements. Where possible, formal Terms of Business should be agreed and signed. However, in the absence of signed Terms, details of the agreed goods/services should be set out in writing, together with proposed fees. It might sound obvious, but when you’re running a business, stay away from WhatsApp or text messages as much as possible. An email chain or proper paperwork is much more reliable.
If you’re providing a service, and the scope of that service changes along the way, make sure it’s formalised and in writing. For example, if you’re a builder and the original scope of the project is to build a wall, but during the project the customer asks to have an additional wall built, make sure this is properly documented.
It’s not always easy to say, ‘put that in writing for me’ but once you do it a few times, it becomes second nature, and it will stand to you if there’s any disagreement down the line in terms of what is owed.
Following a telephone conversation, a brief note of the call should be made, summarising the points discussed and emailed to your customer. There’s no point in keeping diligent records if emails are being deleted or relevant paperwork shredded; you never know what will prove useful in the future. The goal is to support and protect your company’s position. Having written records to hand will provide a clear narrative of all terms which have been agreed between the parties.
Internal credit management procedures
Having a clear credit control procedure in place highlights to clients that the business takes credit management and cashflow seriously. A blanket approach to credit control is best. While allowances can be made for specific clients, a clear credit control procedure ties all clients to the same terms when it comes to making payment. Following receipt of the invoice, your client is entitled to a 30-day period within which to make payment. If payment is not received after 30 days, this is where the credit control procedure kicks in.
The procedure should be tailored to your businesses needs but it could be as simple as:
Sending an email reminder requesting payment within a specified timeline
If monies remain outstanding, follow up with a phone call, which is properly recorded
A final formal warning letter before the matter is referred to a solicitor.
Spend a few minutes drafting standard wording your emails and letters to chase debtors for payment. Have that on file so you can use it for all clients, to save you time and energy.
Go with your gut
If something doesn’t feel right when you’re dealing with a client, don’t ignore it; listen to your own business instincts. Think carefully about whether any of the points above have highlighted any ‘red flags’ and be mindful of the risk of non-payment.
If necessary, take steps to reduce your financial risk, such as taking a deposit or agreeing to milestone payments. And if all else fails, don’t be afraid to walk away. Sometimes walking away from a client you aren’t sure about can be the most profitable decision.
Philip Gleeson is a Debt Recovery Solicitor at Carlisle Solicitors
