Monday, 4 March 2013

New Credit Control Powers Unleashed

Creditors to wield bigger stick over late paying clients

After a very long period of gestation, some might say procrastination, the UK Government has waited until the last possible moment before enacting The Late Payment of Commercial Debts Regulations 2013 on 16th March 2013. Nevertheless, this new legislation holds the potential to transform credit control management for business owners. This is because their potential influence over late payers has increased between twice and eleven times over that which they currently enjoy. I will explain those numbers below, rest assured.
The new credit control legislation is EC-wide and was originally tabled by Brussels back in February 2011. The small number of amendments to the Late Payment of Commercial Debts (Interest) Act 1988 are detailed here. The Government could have gone a lot further especially on curbing onerous purchase terms and conditions imposed by some large firms on their smaller suppliers. But, hey, let's make the best of the new legislation as far as it goes.

Happily, the new rules conceal some very good news for UK creditors. Buried in the changes is this sentence:(2A) If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs. 
This means that for contracts starting after 16th March 2013, a business owner can claim reasonable additional recovery costs incurred in pursuing a late-paying business client. But what is 
'reasonable', one might ask?

Well, if a creditor appoints a commercial third party debt collector or 
credit control collection agency, he will be charged anywhere between 9% and 20% of the original invoice in collection commission, possibly more. So I think a reasonable recovery or collection cost would be, say, 15% of the original invoice. Do you agree? Please comment below if you disagree or if you have another view.

Even for those business owners who have no contract terms and conditions of their own in place, suddenly the new statutory rights bestow upon them between twice and eleven times the leverage over their debtors.

How so? Well, the tables below compare how much business owners can threaten to charge or actually charge their debtors for contracts formed pre and post 16th March 2013. By the way, I personally don't advocate charging these amounts straight away as SMEs can preserve business relationships and persuade clients to pay sooner merely by threatening to charge these amounts in the right manner.  

Back to the tables below. They cover a situation where commercial invoices of £1000, £5000 and £10000 respectively remain unpaid 14 days beyond agreed contract terms. What can the debtor be charged or threatened to charged with by the creditor prior to 16th March and after this date?

Before 16th March 2013:

Original Invoice
Statutory Late Payment Interest
Statutory Late Payment Compensation
Additional recovery costs
(15% less fixed charge)
Total claim

After 16th March 2013: 
Original Invoice
Statutory Late Payment Interest
Statutory Late Payment Compensation
Additional recovery costs
(15% less fixed charge)
Total ‘leverage’

Note. For the examples after 16th March 2013, I have defined ‘reasonable additional recovery costs’ as average commercial collection costs of 15% of the amount due.

By comparing the 'leverage' in the final column of both tables, one can clearly see how the amounts a business can potentially charge its debtors will be much higher for contracts formed after 16th March 2013. By judiciously mentioning these higher amounts in correspondence with late-paying debtors, a business owner now has much greater influence to wield over his clients than before.   

But will business owners use the new late powers bestowed upon them? Only 5% of them actively do at the moment according to recent research. But I reckon this has to increase now.

But wielding these new powers will need care. One can imagine that a small supplier going in 'all guns blazing' a day or two after the invoice is due for payment might get short shrift from a larger client. So a light touch is needed initially. After this gentle start, business owners can legitimately ramp up the pressure at specific intervals. This is classic assertive (not aggressive) behaviour and so will work better when persuading debtors to pay on time. Ltd are well-placed to show business owners how their business credit control can be improved with its unique terms and conditions-based packages. The firm doesn't offer credit control debt collection but do offer credit control services which help prevent late payment problems from getting out of hand. Click the link at the header of this blog or call the number above to find out more.

Sunday, 5 August 2012

Chasing an Invoice

Chasing an invoice

When chasing an invoice, a creditor should consider the following story.

A friend of mine recently asked me for advice on chasing an outstanding payment by a customer of his. By the time my friend had spoken to me, he had already talked to a couple of debt collectors. However, he wasn’t comfortable taking that step.

My chum had been doing some freelance work for another company which always paid within a reasonable time-frame, except for this time of-course. The invoice was more than 6 weeks late. His debtor told him more than once that the directors who authorise payments had been away and that the matter would be sorted out upon their return. Still nothing happened.

After chasing his customer yet again, he was informed that the cheque was sent and that if he hadn’t received it then may e the postal system was at fault in his area. These are pretty typical, albeit not particularly inventive, excuses but at least his customer was talking.

My friend’s issue was that he was about to leave the country for three months and really needed the money to be paid. He was desperate for advice and turned to me. He didn’t know how to ratchet up the pressure on his customer whom he wanted to keep in view of the regular source of business.   

The first advice I offered when chasing an invoice, this particular invoice, was to threaten to levy late payment interest as allowed by the Late Payment of Commercial Debts (Interest) Act 1998. I suggested that he use the calculator on the website and outline the actual amount of late payment interest owed, in a letter to the customer. I told him to add in the letter that unless the debt was cleared by the end of that week, he should issue a VAT-free invoice for the late payment interest. As my friend’s terms and conditions were pretty limp, all he could really do was rely on his statutory rights. I mean he could issue a Statutory Demand or employ a debt collector or issue court proceedings against his customer too. But these were draconian steps that he wasn’t comfortable taking.

The second advice I gave was that, if he had time, he could hand deliver the letter to the person responsible at his customer’s premises. This would also imprint upon the debtor’s mind that payment was a priority case. As such, a personal visit would help to transfer the invoice from the general heap to the smaller priority batch of invoices to be paid. This is because, debtors who are suffering from cash flow problems juggle their creditors and usually have a shortlist of those invoices that require urgent attention and also a list of all the other invoices that won’t make it to the shortlist for payment anytime soon. The visit wouldn’t need to be intimidatory at all but that once there, he should wait in reception until someone in Accounts Payable came down to see him.

The third piece of advice I offered was to sort out his terms and conditions so that stronger pressure can be brought to bear when chasing an invoice.

Lastly, I suggested that he start chasing his customers as soon as the invoice became due and at fixed intervals of 3,5 or 7 days thereafter.

My friend only went with the first piece of advice which was to threaten to charge the late payment interest over the phone. He did have a specific figure worked out though which was excellent. The result is that the customer agreed to cancel the cheque lost in the post and issue a new one which was received two days afterwards.

I’ll be making a phone call myself to my friend when he returns from his sojourn abroad to sort out his terms and conditions and associated client documentation. In this way, he will hopefully have in place a proper credit management system to help prevent such dramas from recurring in future.

Wednesday, 1 December 2010

Shocking New Way To Manage Debtors!

Imagine my surprise when our famed sci-fi writer, the one and only Iain M Banks, turned his attention to the credit management industry in his newest book, Surface Detail. He delves into how genetic advances might, in the future, allow debtors to be marked with a little more than an adverse entry with Experian.

Banks writes about Sichultian law which decrees that if a commercial debt cannot be settled by conventional means, the debtor is empowered and obliged to offer alternative means of compensation. Incredibly, this includes intagliating a generation or two of the debtor's offspring and signing the same over to the care of the creditor. Intagliation, in Banks' future vision, entails the manipulation of a debtor's genetic code so that their offspring are born with intricate, indelible and highly visible skin designs. It's a means of adding generational shame to the debtor's legacy.

Before I rush to draft a new set of clauses for our clients'
business terms and conditions, I am reminded that the Sichultanians are an alien race, Banks' book is a work of fiction and such clauses would inevitably fall foul of UK consumer law, not to mention the Unfair Contract Terms Act 1997.

So what do you think? Tell me about your own alternative means for handling debtors; the more imaginative, the better!

Tuesday, 23 February 2010

The Second Step Towards Improved Business Terms and Conditions

Following on from my last post (addressing the issue of late payment interest)this post will look at a second way of improving your business' T&Cs. Namely establishing time limits for issues/defects.

From time to time your business will encounter customers who raise problems with the work your business has done for them. This is a normal operating issue. You've probably heard some of the most common things such as 'it isn't exactly what I was expecting' or 'I don't like the colour'.

From our experience, the customers who hope to avoid payment don't mention any of these problems straight away but 30 or 60 days after completion, once you're chasing payment.

This can be incredibly frustrating but there is a solution.

I would strongly suggest including a clause in your business' terms and conditions that states your clients agree to notify you, in writing, of any concerns within 7 to 14 days of the job/service being completed.

This doesn't mean that your business would be reluctant to resolve a legitimate complaint after this time frame, however it does seek to isolate any problems as mentioned above.

Unfortunately, this won't eliminate all the contrived problems that your clients raise but it will help to reduce them substantially.

Then, should you still have problems with late payment you can penalise your late or non-payers with the correct level of late payment interest.

Tuesday, 16 February 2010

Improve your Business' Terms and Conditions Today

The statistics show that only around 50% of UK based SMEs agree written terms and conditions with their clients when offering goods and services on credit. Of those that don't, you might think those businesses have some sort of terms and condition in place. They often don't.

Our team often see many businesses run incredible risks by operating and selling goods and services without the protection of terms and conditions. Why is this important? Well the simple reason is that correctly drafted terms and conditions can significantly reduce the risk of late and non payment.

There are a few common mistakes firms make. The first is copying terms and conditions from other businesses. This can often be worse than not having any terms and conditions at all. The other is to have out of date terms and conditions. After all, legislation tends to change and a business must keep pace.

One of the easiest ways to improve the security of a business' cash flow is to spend a few minutes by addressing the statutory late payments interest.

I see with worring frequency that the penalty rate of interest is often lower than what is permitted under UK late payment legislation (this is stated in default area of T&Cs). I would go as far as to say that in many cases this actually diminishes the business' statutory rights and here's why.

Under current legislation, late payment interest can be charged at 8% per annum over and above the base rate set by the Bank of England. Despite this, I often see rates as low as 2, 3 and 4%. Businesses must be so careful not to reduce or eliminate their legally enforceable rights should there be a case involving a despute or legal action.

One solution would be to remove any penalty rates of interest that are currently mentioned in your terms and conditions (the statutory rate is likely to be higher). Even better than this would be to ensure any penalty rates that are mentioned are at least as high as your statutory rights allow.

To conclude using well drafted terms and conditions is crucial in defining the business relationship by which both parties agree to do business.

My next post will address an easy way for businesses to handle disputes.

Monday, 25 January 2010

The secret to securing your cash flow – An effective solution to guard your liquidity

So the previous post established some of the problems that businesses are facing with regard to late payments and their future prospects.

Perhaps your business is facing these challenges?

Thankfully such a crucial business problem does have an effective and relatively low-cost solution.

The process starts by creating terms and conditions for your business. If correctly drafted, your business terms and conditions (plus client documentation) will help to ensure your invoices are treated with priority by your customers.

Other options?

Of course there are other options. However credit insurance and credit factoring can be costly alternatives.

Our advice

Our advice is start from the bottom and work up. After all, solid and well written terms and conditions can make a real difference to your business’ cash flow.

Two examples of this are:

1) by helping to prevent late payment by your customers

2) by providing real options in case of non-payment by your debtors

Monday, 18 January 2010

The Secret To Securing Your Cash Flow – Identifying The Problem

Over 80% of SME’s in the UK have customers who expect goods or services to be offered on credit. In other words, most UK businesses don’t start to receive payment until, say, 30 days after the invoice date.

With the exception of the retail sector, one of the risks you face as a business is the possibility of late or non-payment by clients. The following graph shows that late payment continues to be a significant business problem. Perhaps you’ve experienced this in your business?

Graph 1

Recent figures (from the UK Government’s Annual Small Business Surveys and SME Business Monitors) have been analysed to reveal the extent of the problem identified above with 26% of SMEs regarding late or delayed payments as a ‘Big Problem’.

Graph 2 shows the increased number of company liquidations that have taken place over the last 10 years. Can you spot the broad correlation?

Graph 2

The link between the two sets of data (late payment and business failure) is supported by the EU Commission for Enterprise & Industry which confirms that the high level of insolvencies (one in every four) is due to delayed or non payment.

So it’s clear that delayed and/or non payment of your company’s invoices could have severe implications on the financial health and long term success of your business.

Don’t miss the follow up post entitled ‘an effective solution to guard your liquidity’.