How to….spot a bad debtor

Hotel and catering companies have been hit hard by the financial crisis.  At Daniels Silverman we have seen a steady rise in the number of suppliers and hotels seeking our help with debt recovery over the last year.  Serious cash flow problems have forced some businesses into bankruptcy and many others are on the brink […]

Hotel and catering companies have been hit hard by the financial crisis.  At Daniels Silverman we have seen a steady rise in the number of suppliers and hotels seeking our help with debt recovery over the last year.  Serious cash flow problems have forced some businesses into bankruptcy and many others are on the brink of collapse as they do not have enough funds to continue. Businesses normally become insolvent as a result of cash shortages and as with anything, prevention is better than cure so identifying early signs of stress is critical.

Suppliers are feeling the pinch as their customers are sometimes unable to pay their bills for any products and services received. In some instances customers have shut up shop without leaving contact details. With this is mind, it is crucial now, more than ever, for businesses to take additional steps to protect themselves from bad debtors.

When dealing with a new customer, it is important to do a company search into the business to check that they have a healthy cash flow and that they can cope with unexpected bills and late payments. All too often cash flow is neglected and while profits may have declined, overheads remain the same and suppliers still need to be paid. Be wary of any customer who tries to negotiate longer payment terms as this is a clear warning that they have some cash flow issues. You should look for any trends on the company search where time taken to pay their suppliers has increased. You should take extra caution when supplying to ‘phoenix’ companies, where the assets of one Limited Company are moved to another legal entity. Also take care when dealing with companies where credit ratings are poor or where there is little credit history because a business is new. If in doubt, you should insist on obtaining a director’s personal guarantee to give extra protection.

Thousands of businesses go under each year because their customers delay payment, refuse to pay or are unable to pay their bills. We often find that businesses have failed to prioritise cash flow management and have given credit to customers in goodwill in order to grow the business. You should never assume that because someone seems credible that they will act honourably.

Steps to take to ensure you don’t deal with a bad debtor:

1. Credit limits: If you are giving credit it is vital to know who your customers are and to perform effective credit checks and continuously monitor credit arrangements. Financial situations can change rapidly so it is important that businesses regularly review the credit limits of its customers and watch out for signs that they could pay late or not at all due to financial difficulties.

2. Terms and conditions: Be clear about payment terms from the outset and make sure customers read and sign up to your terms and conditions. These should cover what will happen if a dispute arises, the penalties for a late payment including the rate of interest to be charged and the right to recover debt collection and legal costs. To be enforceable these should be included on a credit application form rather than on the back of invoices, which is too late in the transaction to be legally binding.

3. Speed: When collecting payment, speed is of the essence. Small businesses are often so busy carrying out day to day business that they fail to keep on top of debts and feel unable to enforce payments. Always collect payment immediately if possible. Invoices should be sent as soon as possible and it is essential to keep on top of paperwork. If you do have to issue an invoice by post, follow up within two weeks by statement stating payment is due within seven days; a phone call should swiftly follow.

4. Statutory demands: In respect of non limited businesses, partnerships and sole traders, a business could consider the personal service of a Statutory Demand under the same Act. This gives the debtor 21 days to pay in full or face individual bankruptcy proceedings.

5. Debt recovery agencies: The use of an outside debt recovery vehicle can be cost and time effective. A debt collection agency can give advice and guidance with the drafting of credit application forms, terms and conditions, personal guarantees and insolvency notices. Dedicated debt collection professionals can ensure every avenue is explored to recover debts and have access to a variety of investigation tools and credit checking facilities to trace debtors and evaluate their ability to pay.