August 5, 2021

How can independent businesses avoid bad debt during the festive season?

Independent and family-run businesses often testify to their success being built on word of mouth, their long-standing reputation, and relationships developed over many years. This can mean that formal contracts are often forgotten, causing problems later down the line when late payments happen, and bad debt accumulates. Catherine Rickett, debt recovery manager at Roythornes Solicitors, shares her advice on how to get paid on time during the “season of good will”.

Late payment and bad debt can become serious and sometimes fatal problems for one-man or small businesses. In August 2019, the ICAEW Business Confidence Monitor (BCM) reported that one in five businesses (or 24% of SMEs) were facing serious challenges due to late payments.

There are lots of reasons that issues relating to debt arise with many SMEs reporting that they feel chasing payments will damage valuable relationships or make a bad situation even more confrontational. Taking professional advice can separate the personal from the situation, as well as offering some practical steps to stay on top of credit control procedures and avoid many issues before they even occur:  

  1. Be proactive about collecting payments. Put solid, late-payment penalties and collection policies in place and then stick to them. If you don’t chase as soon as a payment is overdue, experience tells me that you won’t be the first one to get paid.
  2. Make it easy for others to pay you. Consider setting up multiple options such as BACS, direct debit, online payments and even PayPal. 
  3. Know your client and react accordingly. Consider a credit check on new (and maybe some existing customers) if they are late paying. After all, you might find they are having their own financial problems. You can check a company’s status through the free Companies House service or you can see if a customer is the subject of bankruptcy proceedings via The Insolvency Service.
  4. Have clear procedures. You need effective systems in place with standard letters going out on the day after an invoice is due, seven days after etc. It’s not an ad hoc ‘admin chore’; you need to be strict with yourself and your customers.
  5. Consider applying an incentive for early payment.Money is better in your pocket than theirs and whilst you may feel uncomfortable lowering your prices for early payment, often it can cost more to recover debt than any discount applied.
  6. Ensure you have the security of three months’ operating expenses to protect you from unexpected cash flow issues. Bad payers are a business reality and if your company is working from an account balance of nil, one slow sales month could mean instant disaster.
  7. Introducing a third party at collection stage can also help to preserve commercial relationships. Separating the financial issues from the practicalities of an ongoing contract can provide a useful space to solve problems without it getting personal.

Whilst relationships are important to a business, it shouldn’t mean inaction when someone that is due to make a payment goes quiet or a payment doesn’t appear. Business owners need to act quickly and take steps to protect themselves, even during the festive period when it can feel even more difficult to make those difficult phone calls. Smart processes can relieve that pressure and an experienced lawyer can put important preventative measures in place to ultimately protect people’s livelihoods. 

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