In the world of commerce, income is the lifeblood of any company, so when clients stop paying, something has to be done. However, according to a recent study by Company Check, 8 out of every 10 small businesses in the United Kingdom have bad debts from non-paying clients, with almost 7 out 10 companies having had to write that debt off.
With 20% of all small businesses in the UK failing in the first year, late payments are not something that can be ignored if business owners want to have a serious chance of success. It’s also vital to consider the fact that if no payment or indeed acknowledgement of the debt is received within 6 years, any outstanding debts will not be enforceable under the Limitations Act.
How to Go About Debt Recovery
There are a variety of symptoms to look out for that a client might become a late or non-payer and it’s important to recognise them when they arise. They include:
- Unresponsiveness, with phone calls, e-mails and letters going unanswered
- Payment promises that aren’t kept
- An inability to agree with the client on payment schedules
- Excuses being offered early, with the client making complaints about your services
If you can spot the signs early, you’ll be able to use your time and resources more efficiently by not having to chase bad debts later on. However, if you’re not able to and a bad debt ensues, things can get out of hand pretty quickly and cause you untold inconvenience. When you find yourself in this position, you need to seriously consider employing the services of a professional debt collection agency (Important note: most companies allow clients up to 90 days to settle debts before involving a third party, so it’s a good idea to follow suit).
Professional Debt Collection Firms
This is the first and growing option for many people and Companies in the UK. When you involve a debt collection agency in proceedings, it sends a signal to the debtor that you’re serious about chasing the debt, however, you need to tread carefully when opting for this route, as you don’t want to lose your best customers because you’re too quick threaten litigation for unpaid invoices.
It’s also important to consider that professional debt collectors often charge a flat fee PLUS a percentage of payments received, so this needs to be incorporated into your calculations. Essentially, you don’t want to end up paying out more than you’re going to receive from the debtor.
It is essential that the services of a Professional and appropriately licensed agencies are used. In the UK Federal Management are widely regarded as the best for Business Debt Recovery.
Private Debt Collection Agencies recover from individuals. This is likely to be work not paid for or a personal loan. Frontline Collections are the UK’s best Debt Collectors for this type of debt.
Recovering Debts Via the Courts
Pursuing debts through the courts should invariably be your last option because of the money and time it takes to do so. You must ensure that the debt you’re chasing is large enough to justify going to court, as whether you like it or not, writing off the debt is sometimes the most cost-effective option.
You need to make sure that any dispute that has arisen regarding services or goods supplied is resolved prior to any court action or the likelihood of success in recovering the debt will drop considerably.
You should also be sure to find out if the client is able to pay off the debt, because if the person you’re chasing is bankrupt or their business is in the process of being liquidated, the debt is most probably going to be written off.
The Money Claim Online Service
There are a variety of methods you can use to make a claim for debt collection with the first being to use the Money Claim Online Service for debts under £200k. This is an online website run by Her Majesty’s Courts & Tribunals Service (HMCS) and it was created to help small business owners to instigate or respond to claims via the web.
The Small Claims Court
The second option – the Small Claims County Court – will apply if the debt is under £10k, with debts over £100k having to be pursued via the High Court. Typically speaking, the threat of court action is sufficient to prompt debtors into paying, however, occasionally you might find yourself with no other choice.
It’s possible to avoid court action if you can come to an agreement with the debtor about how the debt will be settled. Mediation is an option that should be considered, as it can save you the hassle and money involved in court proceedings.
Creditors are able to charge late payment interest, as well as charges for any extra costs that arise due to debt collection proceedings. This is thanks to official late payment legislation, however, it’s important to understand that it’s the creditor’s responsibility to invoke these rights.
When does a payment become a late payment?
By law, the aforementioned payment legislation kicks in 30 days after invoicing or goods are delivered where public authorities are concerned. For business transactions, it’s 60 days, however, many businesses don’t follow these rules precisely.
Some businesses agree a period of credit with their clients in writing – most usually covering 60 days, beginning the day the invoice was created and sent and ending at the conclusion of the following month.
Late Payment Interest Charges
Legally speaking, it’s possible to implement late payment interest charges if the debtor in question is another business. This can be both a contractual or a statutory right and it’s entirely your choice whether to invoke this right or not.
However, it’s not possible to immediately begin charging interest if you’re owed money by a consumer. Where non-business consumers are concerned, it’s necessary to inform them by letter before any charges are placed onto the debt. This letter should include clear and precise calculations concerning how the interest is worked out and if you follow this route correctly, you stand a good chance of a successful claim through the courts – so long as the interest you’re charging is deemed to be reasonable.
How Much Should I be Charging in Interest?
There are a couple of ways in which late-payment interest can be calculated, with the first being the statutory rate, which is equal to the Bank of England base rate plus 8 percent. This can be implemented for 6 months, after which it can be reassessed. The 2nd rate is a contractual one that can be set either higher or lower than the statutory rate and income should be charged on the gross figure plus any VAT.
Charging Late Payment Interest
If you’re not already charging interest on late paying invoices, there are numerous changes that you’ll need to implement before you can start to. Firstly, you’ll need to ensure that your clients are aware that interest will be charged when payments are late and the information needs to be provided in writing via your Ts & Cs. It might also be necessary to amend your billing and credit management systems.
It’s vital that when invoices go out, they display an obvious payment date, so that your clients are very clear about when they have to pay. When payment is late, you should also think about sending a final warning of impending interest charges, as well as a subsequent letter to inform your client that they have become subject to interest charges on their debt.
In order to lend authority to your claim, any debt-related correspondence should include the fact that it’s your right under law to charge interest and debt recovery expenses for the outstanding balance. If and when a debtor does pay up, you should also be providing a receipt with a breakdown of any interest charged.
Charging Debt Recovery Costs
The amount you can charge for debt recovery costs are set in stone, depending on the amount owed. They are broken down as follows:
- £40 for debts up to £999.99
- £70 for debts between £1,000 and £9,999.99
- £100 for debts above £10k
In the same way you should carefully consider when to charge late payment interest, you should also think about whether charging debt recovery fees is good for your business. Should decide to do so, the client needs to be notified by letter, with a new invoice being created.
When a formal demand for debt payment is made, it’s referred to as a statutory demand, which requires a response from the debtor within 21 days. They have this time to either clear the debt or agree a payment schedule.
It’s also possible for the creditor to request a bankruptcy petition for any person that owes more than £5k or ask that a company that owes more than £750 be wound up. Should the creditor be in possession of a court order stating that the money must be paid, bailiffs can be sent to the debtors place of business or residence to recover the debt. When the debt isn’t recovered, the creditor is then within their rights to petition for bankruptcy.
After this point, you’ll have 4 months during which to petition for bankruptcy or wind up the business of the debtor and any statutory demand will not expire and is only able to be served on debts that are under 6 years old.
Serving a Sole Trader or Individual
When giving a statutory demand to an individual, the most important thing to concentrate on is the way it is served. The individual needs to be aware of exactly what they are receiving and it’s a really good idea to serve it in person so that you are able to prove when and where it took place. Should this prove impossible, you may employ the services of a process server to do it for you.
If getting in contact with the debtor is proving problematic, it’s also possible to post the demand through Royal Mail or serve it through the letterbox yourself. Should you be petitioning for bankruptcy, it then becomes necessary to prove how the demand was served and exactly when the debtor saw the demand.
If necessary, you could also place an advert in the newspaper relating to the demand, however, this only becomes an option if the debtor has moved without telling you or is actively trying not to be found.
Registered Limited Companies
When serving a demand to a registered Limited company, you can deliver it by hand to their registered place of work or by mailing it via recorded delivery. The demand becomes deemed as ‘served’ the moment the debtor company signs for it.
Unregistered Limited Companies
It’s possible to serve a demand to an unregistered limited company to their primary place of work or to a senior officer from within the company, with the way in which the demand is served possibly being directed by the court. In order to do so, it will have been necessary to fill out all of the proper documentation, as well as proof that goods and/or services were provided.
Your Statutory Demand – What it Should Contain
When the statutory demand is served to the debtor, it’s important that it contains information relating to the reason for the demand, as well as the consequences that would transpire should the demand not be paid. It’s also necessary to indicate that it is their right to apply that the demand be set aside and that they can discuss the issue via contact details that should also be included.
An authorised member of your company needs to both date and sign the demand, with the main portion of it stating how much is owed, what the money is owed for and when it must be repaid by. What must also be included is information relating to the unsatisfied judgement and why it is you think that the debtor will not be able to settle the debt.
Certificate of Service
If you want your statutory demand to be upheld or you want to file a petition for bankruptcy, you need to prove that it has been officially served. A bankruptcy petition also needs to contain a certificate of service, which is the official proof that it has been served.
A statement of truth also needs to be included to support the demand, which should be signed by the individual serving it. However, if the debtor admits to be being served, it can be any authorised person that signs it.
If it was you personally that served the demand to the debtor, you need to have filled in Form 6.11, however if another method was used, a Form 6.13 will be required – something that contains information relating to when and how it was served.
If you didn’t serve the demand personally and the debtor does not acknowledge receipt, then the individual who did serve it needs to write the statement of truth. This declaration should include the date on which the demand was served and how it was carried out.
It’s vital when serving the demand, that it is done correctly, because if it isn’t, then the court will most likely dismiss any petition you make for bankruptcy.
Serving Statutory Demands Overseas
It’s also possible to serve a statutory demand when overseas in the same way, with the only difference being that the debtor has 28 days to adhere to the demand rather than 21. Should you be petitioning for bankruptcy, however, there may be some additional restrictions.
Those living and running a business within the European Union are not subject to bankruptcy petitions when they are making a living in that country, with the only notable exception being Denmark. Also, if the debtor is unemployed or retired, any bankruptcy petition will need to be made according to the laws of the land in which they live.
Lastly, should the debtor reside in Denmark or outside of the European Union, it’s possible to file a bankruptcy petition if they have lived in the United Kingdom within three years of the notice being served. The only time this won’t apply is when the demand or petition is served on a day they are situated in either Wales or England.
Should you be in possession of a court order, then it might be that a statutory demand doesn’t need to be served. You may request that the court enforce the order, however, if they aren’t able to, you have the right to serve a company winding-up application if the debt is more than £750.
Receiving Statutory Demands Yourself
When you receive a statutory demand yourself, it’s not a good idea to ignore it. This is because when you do, you risk going bankrupt or having your business forcibly wound up. You need to respond within 21 days by either agreeing a repayment schedule or by paying off the debt in full.
If you don’t agree with the demand, you will have 18 days to apply for a dismissal unless you reside overseas – where that figure rises to 22 days. It’s necessary to complete form 6.4 & 6.5 and deliver it to the court where you would normally submit your own petition for bankruptcy. If it’s stated on the demand that the petition will be submitted to a High Court, then that’s where your application for dismissal must also be submitted.
When you apply for a dismissal (a.k.a. Having the demand ‘put aside’) the deadline for your statutory demand is automatically paused. However, there needs to be legitimate grounds for debt for the court to allow the application – as if there isn’t, it will be immediately dismissed.
If you are successful with your application, the court will set a hearing date and inform every party concerned, but if it is dismissed, the deadline for compliance will be reset to its original date.
When your company is presented with a statutory demand, you also get the right to have it dismissed, so long as there are valid grounds for the application. This is one possible way you can prevent your business being wound up by your creditors.
The growing consensus amongst many is that debt collection agencies are the safest bet. With innovative companies like Frontline Collections delivering excellent results, it seems obvious. It minimises the cost to the user. It also offers a buffer zone in terms of compliance overall. Very effective and direct way to recover debts owed to a business or person.