INTRODUCTION
In principle there is no difference between collection of a business debt and collection of any other debt or damages for breach of contract. If you are in business and have small unpaid invoices upon which you may wish to collect you should visit our SMALL CLAIMS COURT section.There are other considerations in debt collection which might make the general approach to a claim slightly different. Those considerations are as follows.
CREDIT CONTROL
If you are in business, the most important thing for you to do is to construct a debt collection or credit control policy. You will already understand the importance of cash flow and your approach to credit control is linked to your cash flow policy. Whilst your trade debts are uncollected you do not have the benefit of the money which you have earned and, if you are liable for VAT and income or corporation tax you will have incurred that liability regardless of whether or not the debt has paid.It is important to draft a policy which allows you to collect money owed quickly if you are going to maximise your cash flow. Otherwise you will suffer:
- Loss of interest on money which should be in your bank account but which is in your customer's account
- Possibly, interest and bank charges on money which you have used to pay VAT and other taxes on invoiced charges, your suppliers and wages to your employees.
INTEREST
Remember that you are not a banker. You are supplying goods and services. You may include time for payment but there is no reason why your customers should treat this as extending to interest free credit over an extended term. There are various pieces of statute law allowing recovery of interest. As you will see from our SMALL CLAIMS COURT section we recommend the inclusion of an interest claim. The Late Payment of Commercial Debts (Interest) Act 1998. The most important part of the Act is that which implies into any contract for the sale of goods or the supply of services (with certain exceptions ) a term that debt carries with it simple interest from the "relevant date" (the day when payment falls due) until payment is made. The Act only applies where both the supplier and the purchaser are acting in the course of a business.The parties to a contract cannot (save as appears below) include terms to vary or oust the right to statutory interest until after creation of the debt. At that stage the parties are free to agree terms for dealing with the debt. This places the creditor at an advantage. After creation of the debt the liability to pay it with statutory interest exists. The debtor has little or no bargaining power to contract himself out of the liability and in trying to come to terms for payment of a debt by instalments or otherwise he will probably have to concede liability for continuing interest until full payment is made.
A contractual variation of the right to statutory interest is enforceable if the contract contains some other "substantial contractual remedy" for late payment. Where the contract does contain provision for such a remedy there will be no right to statutory interest unless the parties agree that there should be. The obvious examples of "substantial contractual remedy" are:
- Surcharges for late payment; or
- Provision for interest at a rate higher than that allowed by the Act; or
- Arguably, some other remedy such as a retention of title claim allowing the seller of goods to recover possession of them at any time before payment in full.
- it is insufficient for compensating the supplier for late payment or for deterring the customer from paying late; and
- it would not be reasonable to treat the contractual term as ousting, varying or reducing the right to statutory interest.
Of course, interest is not a benefit in itself. It is a remedy for the wrong done by late payment. Therefore, you should think about a strict timetable for sending first and second reminders on bills., a letter before action and the issue of a claim.
The rate of interest under the Act is fixed by the Secretary of State by statutory instrument. Interestingly, in fixing the rate the Secretary of State must have regard to what will compensate the supplier for late payment and what will deter the customer or client from paying late.
OTHER CONSIDERATIONS
Please do bear in mind that litigation can be costly. Furthermore, the issue of proceedings may lead to the loss of time if it is necessary to appear in court for a hearing. Take the time to think about whether the time and expense that you will spend in chasing the money is worth the end result if the case is won at the end of the day.This is the concept of proportionality. It clearly makes no sense to spend several hundred pounds worth of time in chasing a debt of less than that value owed by a person or a business who may or may not be good for the money after you have obtained judgment. In other words, try to keep a sense of perspective about the collection of your debts.
Think also about the true cost of delayed payment to you. Is the County Court/High Court rate or even the statutory rate sufficient when you consider that some of your debtors may not be worth chasing either through insolvency or because they just cannot be made to pay?
Losses of the kind that all businesses suffer from time to time are a sad reflection on modern life and, even more sadly, they are the sorts of overhead which you will need to reflect in your own pricing structures. If this puts up your price for other jobs or sales, will it make you uncompetitive? If so, think about whether your terms and conditions should give you more rights than the 1998 Act provides and whether you should be charging even more interest for late payment of your invoices.
If you chase the right debtors and recover the right amount from them it will hopefully prevent the losses caused by the "wrong debtors" from having to be reflected in your price list to perfectly good customers. Be careful however. We have seen above that making your own provisions can lose you the benefit of the 1998 Act and the advantage of the Act is, of course, that the rate is fixed and certain so that you avoid arguments about the reasonableness of your interest charges.
