Hard times call for tough measures in Credit Control

Effective credit control starts outset of your relationship with a potential new customer - long before an invoice is raised.  Doing business with them should be a considered decision based on an assessment of risk.

If you are planning to give credit then don’t leave it to chance.  Make sure you know who you are dealing with (individual, sole trader, partnership, LLP, company) and then check their credit worthiness first.  Consider taking security such as Directors’ guarantees and don’t leave yourself over-exposed.  Think carefully whether you should be trading with them at all and keep them under review for the duration of your trading relationship.

Consider the terms on which you are prepared to undertake business with your potential new customer. A retention of title clause might enable you to recover your goods in lieu of payment; and Invoices payable forthwith will enable action to be taken to recover payment as early as possible time.

Implement a reliable credit control process and follow up on all invoices routinely - telephone your customer as well as sending statements and letters/e-mails requesting payment.  Personal relationships can be key to collecting your money.  Maintain personal contact with your client as a matter of routine.  Be aware who is responsible for making payments and how their payment system operates – this way you can detect any change in their working practices which might indicate they are experiencing financial difficulty. For example, are they taking longer than usual to release payment?  Are you being met with promises of payment that fail to materialise or being asked to extend credit terms? This knowledge will enable you to be first in the creditors’ queue to recover your money before the business fails.

Remember the tools at your disposal for when things don’t go according to plan:

1. For a Limited Liability Partnership or Company, failure to make payment of monies is evidence of their insolvency and entitles the creditor to present a petition that they be the subject of a Winding-Up Order. Providing the debt is overdue (hence the benefit of terms providing for payment forthwith) and there is no genuine dispute, a letter advising of your intention to initiate Winding-Up proceedings in a matter of days is a very effective threat and generally more so than the threat of County Court proceedings. The objective is to secure payment quickly, ideally before other creditors, and before your customer realises that they are unable to continue trading.
   
   For an individual, sole trader or a partnership you can serve a statutory demand, which requires payment of the debt within 21 days, after which a petition for their bankruptcy can be issued. Again, the debt must be overdue and not disputed.
   
   The effect of a winding-up or bankruptcy order is more immediate than a County Court Judgment and can secure payment for you ahead of other creditors.
   
   

2. Initiating proceedings in the County or High Court. This process routinely begins with a letter of claim which is followed by the issue of proceedings and, in the absence of a defence being filed, proceeds to Judgment. Once a Judgment has been secured (typically 5 – 6 weeks after initiating the process) enforcement action can be taken if the debt still remains unpaid.

In summary:-

• There is no substitute for due diligence: it is vital that you know your customer.
  
• Act quickly at the first sign of trouble.  Any delay could be the difference between a successful recovery and a bad debt.
  
• Act decisively. You are unlikely to be the only creditor and tough measures may be required to protect your interests.