...is information and communication.
In certain circumstances you will be unable to recover a debt, for example when your customer absconds without trace, perhaps abroad, or does not have the means by which to pay. They may even become the subject of a bankruptcy or winding up order. There is little justification for spending time and money pursuing debtors where the prospects of recovery are poor.
At the beginning of a new trading relationship you are in the best possible position to obtain information about your customer. Make use of this and find out:-
- Who you are trading with
Do you really know the identity of your customer? You might be speaking to Edward Willett but is he really your customer? Is he perhaps Edward Willett trading as Willett King. He might work in partnership with one or more others (each of whom will incur liability to you) perhaps Edward Willett and James Willett-King trading as Willett King. Edward Willett might even be a Director or employee of a limited company in which case he has no personal liability to you, your customer being company, Willett King Limited.
Note: when dealing with limited companies it is good practice to ask for their registration number. All companies are centrally registered at Companies House. Obtaining that unique number will avoid any confusion as to identity. Be aware of the possibility for one company to trade as Willett King Limited and another as Willett King (Leamington Spa) Limited. Both might refer to themselves as Willett King Limited and yet they will be two different companies.
Identifying your customer is crucial for effective credit control as you need to know where the liability for payment falls and who to pursue in the event of non payment.
- How to contact them
Once you know the identity of your customer you need their contact details which should include:
- The full postal address of the business as well as home addresses for sole traders and those in partnership or the registered office address of a limited company
- Telephone and fax numbers relevant to each address
- email or web addresses
Having a fast and effective means of communication can ensure that you are amongst the first to realise that your customer may be experiencing financial difficulty. You can then minimise your exposure to potential loss by placing a stop on business and making an arrangement for payment of existing debts.
- What their financial position is and how they might pay you
All businesses are different but, where goods and/or services are provided without prior payment there is the risk of bad debt. To assess that risk, first consider who is liable to pay it. Is it just Mr Wright? If he is in partnership then each of his partner is liable to the full extent of any debt. You can also recover money or assets held in the name of the partnership. When dealing with a limited company however you can only recover money or assets held in the name of that company. Directors do not ordinarily incur personal liability for the debts of a company unless they have given a guarantee.
Remember, the more people who share liability for payment of the debt, the more likely it is that you will get paid and understanding who you are dealing with is fundamental to assessing risk.
It helps to know what steps you can take to recover your money if things do go wrong. If a debt of £750 or more has accrued and is not in dispute, you can threaten bankruptcy proceedings (against an individual) or winding up proceedings (against a company). If your customer owes money to a number of people this threat might be enough to get your debt paid first. The alternative is to send a letter demanding payment under the threat of Court proceedings and, if payment remains outstanding, to issue proceedings. If you choose this route and secure a Judgment against your customer the law will allow you to take steps to recover the debt (enforce for payment) in the following ways:
- Against goods held in the name of your customer. Under a Writ or Warrant, a Sheriff or Bailiff is authorised by the Court to attend at premises for the purpose of seizing goods belonging to your customer for sale at public auction, the proceeds of which are used to discharge the debt.
- By freezing money which belongs to your customer but is being held by a third party, typically by a Bank or Building Society in an account open in the sole name of your customer. Under a Third Party Debt Order, the law can require that third party to make payment of the debt direct to you.
- Where your customer does not have enough money to pay the debt in full but is in regular paid employment, the Court can compel his employer to make deductions from his earnings thereby paying the debt by weekly or monthly instalments. This is known as an Attachment of Earnings Order.
- By Charging Order against property held in the name of your customer. If your customer is unable to pay the debt immediately you can secure it against any interest he has in property, much like a Building Society would secure a mortgage. Taking a charge opens up the potential to apply for the property to be sold so as to discharge the debt from the proceeds but this can be expensive and is not a step which is routinely taken to recover trade debts.
The more knowledge you have as to your customer's financial situation the easier it is to take action to recover debt or decide that it is not commercially viable to do so.
Before trading with someone ask which Bank and Branch they bank with. If they give you their bank details make a note of them. If they pay you by cheque, keep a copy. This information will enable you to enforce any Judgment you obtain by Third Party Debt Application. Is your customer employed? If so, ask for the name and address of their employer. This will help should you need to apply for an Attachment of Earnings Order.
Remember to keep this information up to date. You might be surprised how often a customer might divulge useful information in the course of their dealings with you.
Finally, it is important to establish a procedure to chase for payment of money. If you have an ad hoc system your customers can, and will use it to their advantage. Having raised an invoice it is important to follow it through. Often invoices are marked as payable in 30 days. Why? In practice this means that no action is taken by either party for that duration. Send out statements to remind customers that money is due to you. Follow this up with a telephone call. Speak to someone with authority to make the payment and find out when it will be made. Make a note of the call and follow it up if the money is not then paid. In this way you should find out if there is a problem with the work / service at an early stage and take steps to resolve any problems. If payment remains outstanding then write detailing your conversations and give a deadline for payment explaining what you will do if the money is not then paid. Follow this through unless full payment or reasonable proposals are made. In this way your customers will become familiar with your procedures and should pay you within a timescale that you find acceptable.
Good luck!
For more information or advice please contact Elaine Crowder in the debt recovery team.
