It is essential that businesses ensure that they have good credit control procedures. Without adequate credit control procedures in place otherwise successful businesses can find themselves with cash flow difficulties. Credit control is therefore essential to ensure the liquidity of your business.
Step One: Know your Customer
The first step is to prevent bad debtors becoming customers in the first instance. You can try to minimise the risk that someone does not pay you by undertaking credit checks on individuals or companies before you do business with them. If you discover that someone has a bad credit history then you may want to reconsider doing business with them or take it into account when deciding the terms upon which you are prepared to do business with them; for example, by taking money up front.
Step Two: Communicating with your Customer
You should maintain regular contact with your customer during the payment period to try to prevent invoices becoming overdue. As an example, you may choose to call them a week after the invoice has been issued to check that they are happy with it and then follow up with a call a week before the invoice is due to remind them that it is about to become due. This should prevent someone claiming they never received your invoice or that they have overlooked it.
In addition, you should ensure that your client or customer is aware of your terms and conditions of payment so that they know when they are due to pay their invoice and the methods of payment that you will accept. This information should be clearly stated on your invoice.
Step Three: Take Action
The method that you employ when pursing an overdue debt will depend on the customer in question and there is not a ‘one size fits all’ solution. Although someone might hold themselves out as being a good customer, who will pay ‘soon’, a good customer is one who pays their invoices on time.
Unless you have a specific reason for not pursuing the debt, it is usually best to take firm action as soon as possible. This can be with regular chasers by telephone, letter or email. The key is to make sure that you keep the pressure up on the debtor as they are more likely to pay if you regularly chase them. Additionally, make sure there are no long delays between your correspondence with the customer.
If you have sent formal “chasers” and the debt still remains outstanding then you need to consider issuing Court proceedings against the debtor. If the debtor refuses to pay, you may need a court order to try to enforce your claim against them.
In order to issue proceedings you will need to follow these steps:
- Firstly, a Letter of Claim (which complies with the relevant Court Protocols) has to be sent to the debtor. This letter sets out your claim against the debtor and includes all the relevant documents; for example, the outstanding invoice, the contract between the parties and any relevant correspondence “chasing” payment of the outstanding invoice. The claim will usually be for breach of contract: the debtor having agreed to make payment of the debt by a certain date and by failing to make payment they are in breach of the agreement. The breach should be clearly set out in your Letter of Claim;
- If the debtor still does not pay, you can then issue proceedings. This will involve preparing further documents to be sent to Court.
If you have a significant number of debtors, it may be worth training your staff to pursue invoices more effectively. You may want to include training for your staff on the drafting of Letters of Claim and the issuing and handling of small claims (i.e. claims for less than £10,000). The Small Claims Court is designed to be used without legal representation and, as such, it would be possible for your staff to deal with these claims themselves. However, more complex and higher value claims (generally those for more than £10,000) may need at least some input from a Solicitor.