Debt tips to keep the bank smiling
Managing your debts on credit sales, when working on business travel contracts for example, is an ongoing challenge because the risks to your business change over time. Below is my checklist to help prevent bad debts at each stage of the supply chain.
Ensure you carry out due diligence on companies wishing to purchase travel from you on credit:
- Undertake a credit reference check through an agency such as Dun & Bradstreet or the bank.
- Review the company’s latest accounts via the online facility of Companies House Direct.
- Obtain credit references from other established suppliers.
If you then decide to offer them a trade account, make sure you set a cautious credit limit on their debtor ledger account so that services will stop being fulfilled when this limit is reached.
When formalising the terms of trade on a credit account:
- Seek legal advice if an Agency Agreement is being put in place that does not match your standard terms and conditions.
- Clearly set out the agreed settlement terms and invoke your right to stop supplies if terms are breached.
- Include a clause to allow late payment interest to be charged in line with the statutory rate set by the Bank of England on December 31, plus 8%.
- Secure the debt via a legal charge by allowing rights of recourse to company assets upon non-payment.
- Obtain a personal guarantee from the company directors or owners.
Your credit controller should regularly check:
- Invoices are settled on agreed terms.
- The total credit limit is not breached.
- Due diligence is repeated on all trade customers on a regular basis.
- Annual accounts are submitted by all trade customers for review.
- Late payments are charged interest and accounts stopped until they are brought back into order.
If it goes wrong…
If a debtor remains unpaid and outside of the credit limit or settlement terms, you should immediately look to mitigate the bad debt risk:
- Cease all supplies.
- Investigate the latest financial position of the company through trade sources and via credit reference agencies.
- Write a warning letter confirming the amount you consider due and advising the company that the matter will be referred to a solicitor if settlement is not proposed and agreed within a fixed period of days. Legal advice is recommended at this point because a “letter before action” or “default notice” must meet strict criteria.
A solicitor may advise you to commence proceedings for recovery in a county court if the debt is less than £5,000.
If successful, the defendant will be ordered to repay the debt.
If the debt remains unpaid you can start enforcement action to recover the debt, such as appointing a bailiff to sell the debtor’s assets.
Alternatively, you may be advised to issue a statutory demand for repayment. If the demand is not fulfilled within the requisite timeframe you may then issue a petition against a company debtor. The court can then order the company to be wound up, or the individual declared bankrupt.
Contact us
For further information, please contact Andrew Burnham or email your enquiry to us.
This article first appeared in TTG on 25 January 2012.
