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Debt Recovery – how can you reduce your exposure to bad debts

Even successful debt recovery comes at a price, in terms of time spent pursuing payment.

Debt Recovery

It is therefore worth investing in business practices that reduce your exposure to the risk of bad debts, such as the following:

  • Before accepting business from a new client, carry out “due diligence” checks to assess the risk of them defaulting on payment. You can use online resources like the Companies House website to obtain copy accounts, if the client is a limited company. Alternatively, you can obtain credit reports on the client. As well as the latest financial filings, these give details of directors, mortgages and County Court Judgments for failing to pay debts. Beware of newly incorporated companies where no financial information is available. Also search online for reviews or news reports that suggest the client may be high risk.
  • Monitor your existing clients for any downturn in their business that could leave them struggling to pay your invoices. Review their credit status every six months, and keep an eye on the news for reports of a downturn in their business sector that could affect them.
  • Agree payment terms with each client in writing and signed by them, stating the due date for payment and, if by instalments, the due date and amount of each instalment. This will make it easier to pursue late payments, without being sidetracked by arguments as to whether payment is “late”. Also state the rate of interest that will apply to late payments.
  • Where possible, seek payment in advance. If this is not possible, settle for a deposit up front and agree a date for payment of the balance. Only start work for the client once the advance payment or deposit has cleared and the money is in your account.
  • Vary your payment terms depending on the client. For a new client, or one identified as higher risk, set a low credit limit and short payment term. For a longstanding client with a good payment record, or one identified as lower risk, you may wish to offer a higher credit limit and longer payment term.
  • Send out monthly or weekly invoices, so both you and the client can keep an eye on fees. Make it easy for clients to pay by including your bank details on every invoice and reminder, and offering the facility to pay by direct debit and online. Put a link on the home page of your website to a payment screen, so clients can find it easily and pay promptly. If you add interest to an overdue invoice, send out a new invoice showing the revised sum.
  • Try to establish a good working relationship with individuals at the client company, and effective channels of communication. This should make it easier for both sides to broach the subject of payment and iron out any difficulties before they escalate.
  • Ensure you have rigorous credit control procedures in place. Invest in an accounting package that enables you to see at a glance who owes money, when it is due and whether they pay. Keep your accounts up to date and, if you can afford it, employ a credit controller to keep track of and chase up unpaid invoices.
  • In any event, take prompt action to recover sums owing. Depending on the nature and size of your business, it might be economical to outsource your debt recovery to a debt collection company or solicitors who offer a debt recovery service.

Kidd Rapinet offer a computerised debt recovery service. Please contact us for more information.