According to risk manager Atradius in its October 2018 Payment Practices Barometer, the UK has the highest proportion of overdue invoices in Europe at a staggering 48.7 percent. The next worst is France at 47.45 percent followed by Switzerland at 46.5 percent. Those wanting prompt payment ought to relocate to Denmark where overdue invoices stand at 32.65 percent, or the Netherlands, which has just 34.55 percent of invoices overdue.
Retail practices are less likely to suffer late payment, but those working for “corporate” clients are more than likely going to encounter cashflow issues from time to time. The problem for them is what to do to speed up the process.
Philippa Dempster, managing partner of law firm Freeths, thinks debtor days are being pushed out for a number of reasons, notably “electronic invoicing and payment systems, that seem to slow things down as details have to match precisely, and purchase order numbers which cause issues too”.
The difficulty with getting paid
Problems for many are caused by the lack of documentation. Paul Carrotte, head of collections at ICSM, a debt recovery specialist, thinks that firms need to become more guarded with their approach. “Industry has moved beyond gentlemen’s agreements,” he claimed. “A simple handshake and ‘my word is my bond’ was once enough to seal many a contract, but not any more.”
Alex Hilton-Baird, managing director of Hilton-Baird Collection Services, agrees. Experience has taught him that “whether a signed contract, proof of delivery or terms and conditions, it can be difficult to recover payment without proof of the debt”.
A similar view is taken by Philippa. As a lawyer, a good contract goes to the core of excising delays. She advises firms to insert two key provisions into their contracts – a right to suspend further supplies or services if there is no payment and the terms have been exceeded; and secondly, that a contract can be terminated if payment is late.
She explains that these terms are critical as the law does not provide a right to cease supply when payment is late – “even if you think that a client is likely to be insolvent, you are generally not entitled to stop performing the contract and if you do, they would be entitled to terminate the contract itself and claim compensation”. By extension, Philippa says that businesses who put clients “on stop” are playing a dangerous game if not permitted contractually.
Other useful clauses that Philippa recommends are that the undisputed part of any invoice should be paid regardless; there is no set-off so a client in dispute must pay without deduction and then bring a separate claim; limitation of liability and exclusion of indirect and consequential losses and ideally loss of profit too; and a right to claim interest.
For Alex, the key to getting paid is knowing who you’re selling to. He reckons that credit checks, for instance, are vastly underused and says that “businesses should be routinely checking existing customers as well as new customers”. He says that a useful tool for this is an account opening form. Practices can use it to gather all the information they need at the outset, including contact details of key personnel and company registration numbers, while also getting the customer to agree to and sign the terms and conditions of sale.
Dealing with recalcitrant debtors isn’t easy, but the process can be started in-house without the need to call in the professionals.
Alex makes the point that there are often instances where debtors can be evasive purely because they can’t afford to pay the sums owed. This is why he says creditors should make contact and “work… to agree a repayment structure that fits – if indeed that is the case. The excuses some give for non-payment can range from the weird to wonderful, so getting to the bottom of whether they’re genuine is crucial.”
Paul agrees with this tack, but adds that creditors should remain firm and not become a pushover – “insist all new work or orders are paid up front but allow them to pay the outstanding amount over a period of time in small instalments”. It’s not ideal but at least the debt will be paid.
One tip from Philippa is to record payment run cut-off dates: “Many businesses process invoices in the month that they are received and so if you prepare a monthly invoice and it’s received the first few days of the following month, it can often miss the payment run… Changing when you send invoices out can make a considerable difference.”
A final notice letter on practice letterhead is another weapon to consider. There are many templates to choose from and letters should be delivered with proof of postage or with email read and delivery receipts. The letter should restate what is owed and that it must be paid immediately or by a set date.
Another option noted by Paul Carrotte is a personal visit to the client: “They may be embarrassed but if you can catch them and speak one-to-one, it can break the ice and give you the opportunity to gauge their true intentions.”
Bringing in the professionals
However, where debts are disputed and have not been resolved within two to three months, then in Philippa’s experience, it will have to go legal for the impetus to resolve it. Before issuing proceedings, she warns creditors to “assess the risk and keep all the evidence”.
Action improves payment odds, says Philippa. Where debts aren’t disputed, over 90 percent will be paid reasonably promptly if the matter goes legal. But “where debts are disputed, we find that around 60 to 70 percent will get resolved by negotiation before issue of proceedings. Where proceedings are issued, it is rare that the matter will not settle well before any trial. In our experience, less than 1 percent of cases will go to trial.”
As to the cost, many recovery agents operate on a success fee basis, taking only a minimal upfront administration fee. This, according to Alex, “mitigates the risk of ‘throwing good money after bad’”. Further, under the Late Payment of Commercial Debts (Interest) Act, businesses have the right to compensation and statutory interest on any overdue invoices to help cover debt collection costs.
In Philippa’s experience, few take advantage of the Act, or their own terms and conditions, which entitles them to charge interest, until the debt has gone “legal”. She says, “solicitors will either work on the basis of hourly rates with estimates, fixed cost, or on a ‘no win, no fee’ basis”.
But if the matter is being handed on, time is of the essence. As Paul has seen, most “don’t want to upset the customer or are concerned at the cost of doing so. But leaving it too late can mean that other people have already started their own legal action leaving you at the back of the queue or your client has become insolvent leaving you high and dry altogether.”
Often, though, once the matter is passed to a debt recovery specialist, a first stage legal letter might just do the trick. Paul says “sending these letters shows you mean business and is a further ramping up of pressure. Many firms will pay up at this stage or seek terms to settle over time which is better than proceeding to collection and/or legal action.”
But some seasoned late payers won’t ever pay up without further action. As Paul points out, “debtors can move address, deny ordering the work, despite the evidence against them”. At this point a debt collector may be needed. There is, of course, no guarantee that a visit from the collector will work; taking the claim to court may be the last, and only, other option.
Paul highlights that “once judgment is obtained then the fun really starts. Some people don’t realise the power of a county court judgment. It isn’t just a black mark against a company’s credit rating, it really does open up the doors to what you can do to get your money back.”
Ultimately, the earlier a practice takes action to recover an overdue invoice, the better chance there will be of avoiding a bad debt. One thing is certain – sticking one’s head in the sand isn’t going to make the problem go away.