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Justin Dollow, Debt Recovery Specialist and Litigation lawyer with Crosse & Crosse discusses the issues of rising levels of Commercial Debt and the Late Payment Legislation.

"Risky Business"

"Commercial Debt is on the Increase" says The Credit Services Association, following the most comprehensive study of the UK Debt Collection Industry ever undertaken. The amount of debt being passed to debt collection agents now exceeds £5 billion p.a.

Business to Business invoices can take months to be paid, and often get forgotten in a game of "Juggle the Cash flow" and "Robbing Peter to pay Paul" . Statistics say that 80 % of new businesses fail in the first 12 months. This puts suppliers of goods and services to those businesses at significant risk.

You may often find that some businesses are allowed to continue trading, insolvent, only by their suppliers' willingness to provide goods and services on "Credit". Remember that once any of your invoices remains unpaid, 1 day beyond the contractual due date, you are effectively providing credit to that customer.

The CSA ("Credit Services Association") does in fact consider that giving customers time to pay by instalments, beyond the contractual due date, is regarded as providing "Credit" and is potentially capable of requiring the provider of the "Credit" to hold a "Consumer Credit Licence".

Giving credit is often, unfortunately, a necessary evil. We would all prefer to be paid in advance in cleared funds. However the reality is that in order to remain competitive we will have to at some point, allow payment terms and some form of credit to customers.

There is an inherent risk in giving credit in any form and the figures show that there is significantly more risk in providing credit to new businesses. The only real answer, is to know your customers!

The grape vine does work well in small circles and rumours about customers and competitors, although often to be taken with a pinch of salt, should not altogether be ignored. A good customer who has made previously consistent orders over a period of time and has always paid on time, is rumoured to be struggling to make ends meet  but has requested four times the usual order...this should start to ring the alarm bells and further investigation may be appropriate.

Knowing your customers and being interested in the day to day running of their business is almost as important as the interest that you will show in your own. Your business will have an interest in your customers' business being successful. Decisions to provide credit to carefully selected customers could help to achieve that mutual success. If in doubt about any potential client/customer's credit worthiness, consider a detailed credit check or some form of Security, i.e. a Directors' Guarantee, or both.

Investigators and independent companies now offer full financial dissections of most Limited companies and are able to produce surprisingly detailed reports containing various information obtained from Companies House, credit reference agencies and now, independent Data Collection Companies who specialise in collecting detailed data on payment histories and other valuable information.

New Legislation

The United Kingdom was one of the first countries in the European Union to implement late payment legislation to help promote a culture of prompt payment.

The introduction of the Late Payment of Commercial Debts (Interest) Act 1998 and Late Payment of Commercial Debts Regulations 2002, according to CSA, has not been met with much praise, as is shown by the figures produced recently by the CSA, "Only 3% of businesses surveyed believed it had an impact" This (in my view) is mainly due to a lack of knowledge of the legislation and also very importantly, a reluctance by companies to antagonise late paying customers, with penalties and interest.

The legislation, if applied properly and to its full potential does mean that collection of small outstanding invoices should be easier for internal Credit Management as it provides a valuable deterrent and in addition placing debts with third party agents like solicitors or debt collection agents should on balance be a far more cost effective proposition.

The legislation provides for Penalties and interest at 8 % above the bank of England's Official dealing rate, to be added to every invoice over £5.00 which was paid after the contractual due date. The penalty is fixed dependant on the size of the invoice. In theory, although it has not formerly been challenged, penalties and interest can be claimed retrospectively on all rendered invoices whether subsequently paid or not, for every invoice rendered after the date the legislation came into force, on or about 7th August 2002. 

The key is, Internal Credit Management with emphasis being placed on management of the customer and their individual circumstances with the help of the legislation, and not management of the debt itself.

This article appeared in the August 2006 edition of Devon Today and was correct at time of going to press. Please contact us for up-to-date information.