Late Payment - When to use a debt collection agency

There is a real culture of late payments in the UK.

For business to business transactions, most firms automatically expect 30 days credit. In fact, if you don’t agree different terms, the law says businesses can take 30 days to pay by default.

If you find yourself lucky enough to be supplying very big companies, you will sometimes find they demand 60 or 90 days to pay, or maybe even longer. Often those long payment terms are then passed down the line by over-stretched suppliers, so it is the very small businesses at the bottom of the supply chain that suffer the most.

The biggest problem with this culture is that many businesses see it as perfectly acceptable to extend their 30 days to 35 or longer – without asking. It can be a real strain on your cash flow to be waiting yet another week for cash that’s rightly yours.

One of things you can do to improve your cash flow is to be up front with all clients about your willingness to use a debt collection agency, should acceptable credit terms be stretched without permission.

For many businesses, just receiving a letter from a professional debt collector is enough to trigger a swift payment. There are clear processes you can follow to help you get paid on time, and know exactly when it’s right to pass the debt onto an agency.

First off, you need to be utterly clear with clients upfront about the terms and conditions of the product or service you supply. You should get a set of standard T&Cs drawn up, and ensure they have a clause laying out the credit terms you offer, and the process you will follow if those terms are broken.

Typically this will state your right to charge a specific rate of interest after 30 days. Your clause might read something like (warning, legalese ahead):

“The Company shall be liable to pay interest on any overdue amount at an annual rate of 2% above the prevailing base rate of Lloyds TSB Bank plc, which interest shall accrue on a daily basis from the date payment becomes due until the Service Provider has received payment of the overdue amount together with all accrued interest”…

Really you should get a solicitor that specialises in contracts to help you draw up a contract that is most relevant for your business.

You can also reduce your risk by running credit checks on new customers before you start dealing with them. It may seem like you’re slowing the sale down, but you’ll appreciate discovering potential problems before they happen.

You might also want to try our company credit checking service.

Now all you have to do is closely follow a standard process when invoices become overdue. Have a set of three standard letters that you send to clients when monies are owed, telling them how much is due and the penalties for not paying up immediately. The Pay On Time Campaign has a set of letters you can use.

It’s sensible to get someone within your business who doesn’t have day-to-day contact with clients to be the debt chaser. That way you can try to maintain a good working relationship with the client. But be sure the left and right hands are speaking to each other. The client must be aware they cannot order more from you while a debt is still outstanding.

Finally, if you have followed this guide and still not been paid, it’s time to call in a debt collection agency. Many businesses stop at this point. But the reality is if you keep threatening action and don’t follow it through, there is no incentive for your client to cough up.

Don’t sit on the problem for a few weeks hoping the client will pay. Agencies say the older the debt becomes, the lower the odds of it being paid.

You should search out an agency you feel comfortable with and can work alongside on all future debts. They will have the ability to do a huge amount of damage to your reputation, so ensure you like the people you deal with and feel you can trust them. You should also check they are fully legit and registered on the Credit Services Association website.

If you have followed your credit chasing process through, the advantages of using an agency to continue chasing the debt are clear. They have the time and expertise to focus on the recovery – unlike you, that’s all they do. A firm that knows what it’s doing will get a quick result. And if the client is unable to pay, they will be able to work with you to look at the options and take formal legal action.

The only downside is the cost – typically up to 10 per cent of the debt (and it can be more if your debt is small). But 90 per cent of an outstanding debt paid is better than 100 per cent of it still sitting in your client’s bank account!

Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.