Businesses Must Prioritise Credit Control

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Forbes Collect Article

19 March, 2020

Bad cashflow remains the key risks to businesses.

The Insolvency Service has recently reported that in 2019, underlying company insolvencies have escalated to their highest annual level since 2013. This increase has been driven by an increase in Administrations and Creditors' Voluntary Liquidations; which are at their highest level since 2009. These alarming statistics demonstrate the difficult financial position faced by many businesses. In many instances, even where businesses record increased turnover, profits remain relatively stagnant.

Uncertainties over Brexit remain and of course the full impact of coronavirus on industry and business presents unprecedented and significant challenges to the business community.

Struggling business will often delay paying invoices as a tactic to ease cashflow problems. They do this by treating invoices as a form of credit by choosing when to pay, rather than paying them on time. Of course, this approach simply pushes the issue further down the line, with other dependant businesses or sub-contractors effectively acting as a bank and facing poor cashflow as a result.

However, even in very challenging times, businesses can adopt simple guidelines and procedures to bolster their credit control. They can also be aware of their options in order to mitigate against poor cashflow. We always recommend the following:

1. Clear and incorporated terms and conditions are much easier to enforce and often provide several options on enforcement to suit different situations. Therefore, review your terms and conditions ('T&Cs') with a solicitor to ensure that they are up to date and legally compliant.

Take advice as to when these should be sent to customers and clients to ensure they are legally binding. Having a robust set of T&Cs will forearm a business when it needs to rely on them.

2. Linked to the above, consider whether your T&Cs should include specific provisions such as:

  • A binding retention of title clause which means that ownership/title of goods being supplied does not pass to the buyer, unless all invoices are paid. Also think about incorporating a mechanism for being able to take back those goods if the need arises; and
  • Who owns the intellectual property rights to any products, brands, inventions, designs or other works provided, before payment for them is made.

3. Carry out regular credit checks and let this inform your payment terms.

4. You should consider requesting payments on account where appropriate.

5. Request payment of invoices shortly before they fall due as a reminder to the payer. Then, as soon as they fall due, send a demand for payment and start to charge interest.

6. Instruct a solicitor who specialises in debt recovery to take swift action in the County Court if payment is still overdue after being demanded. In our experience, the sooner you start this process, the more likely and the sooner you will be paid. Most businesses want to avoid costly and time-consuming Court action and may therefore pay sooner.

7. Before taking Court action, you should investigate the assets of the debtor. This step would reveal whether the debtor has assets which can be seized and sold after a judgment is obtained such as plant, machinery, equipment or other stock. Similarly, you should also conduct Land Registry searches against any land or property which the debtor owns because it is possible to secure a County Court judgment against a debtor's property by way of a 'charging order'.

8. For undisputed debts, you might consider starting the insolvency process against a debtor company. You can apply to the court to close or 'wind up' a company if it cannot pay its debts (known as compulsory liquidation). To wind up a company you must:

  • be owed £750 or more;
  • be able to prove that the company cannot pay you; and
  • establish that there is no legitimate dispute over the debt in question.

It is important you take legal advice before starting this process and also serve a valid statutory demand as a precursor.

There is no doubt that effective credit control is critical to each and every business, never more so than at present. It is no surprise that an absence of ready cash hinders the ability to fund a business properly and drive growth for the future.

But being aware of your options and taking swift action will maximise your chances of being paid and send the right message to the marketplace that you will not tolerate slow payment or bad payers.

For more information contact Stephen McArdle in our Dispute Resolution department via email or phone on 0333 207 1142. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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