Managing company debt - prevention is better than cure
Part 1 - deals with the various PREVENTATIVE MEASURES which might be employed to avoid exposure to risk.
Part 2 - will address the standard CONTRACT TERMS which ought to provide the best protection in the event of failure to deliver payment.
Part 3 - is intended to deal with the measures available should parts 1 and 2 fail - LITIGATION & COLLECTION.
Extending credit is a risky business and informed caution is essential when assessing the level of risk. If you think that enforcing the terms of a contract is time consuming and expensive here - try litigating in a foreign jurisdiction. Some basic precautionary steps might minimise your exposure. The desire to make the sale can sometimes overwhelm common sense. However, sensible precautionary steps will protect you later without frustrating the sale. Always remember the following:
Basic Checks - Every reputable company in the developed world has a credit status of some sort - ensure you are as well informed as possible. Credit checking is frequently an inexpensive way of ensuring that the purchaser of your product is in a position to pay for it. Credit checks in the developed world are usually a good indicator that it is safe to enter into a credit arrangement at the recommended level. Emerging markets are more difficult to gauge but reports are available and if used in conjunction with extreme caution, will still provide some protection.
Know your customer - Your staff should always ensure that
they know who they are dealing with. It is no use
trying to mount a legal action in a foreign jurisdiction
(or in the
Record Keeping - It may sound obvious, but the number of recoveries which fail because the order been lost or mislaid is astonishing. All written orders, PODs and invoices should be immediately retrievable so as to resolve queries the moment they arise. Oral requests to vary the terms of an order should always be confirmed in writing. Email is easy but ensure it can be retrieved whenever necessary.
Trade Association - Does your trade association hold a database of organisations who have previously caused difficulties to other members? This might be the best indicator of all. Many trade associations maintain such lists, which provided they are kept up to date and are accurate, are a very useful and free source of information.
Invoicing - Time will run from the date of the invoice. Invoice immediately upon delivery of the goods. By invoicing in a timely manner you can minimise the potential for delayed payment. This will certainly have repercussions should you wish to impose penalties for late payment.
Contract Terms - This is a topic in its own right and will be dealt with in Part 2 of this series. Invoice your creditors immediately and ensure your standard terms are watertight. Don't put them on the invoice - it is too late. Notify your clients of the standard terms at the time the contract made (point of sale).
Penalise Late Payment - Claim interest: Once a payment is overdue then interest can be charge on all commercial debts.
countries have a system of late payment penalties
within their legislative framework - If you are
trading from outside the
So when is a payment late? - Wherever the contract provides for payment periods the payment is late if it is made after the last day of the credit period.
no credit period has been agreed, then in the
Once payment is delayed don't delay - act immediately
Credit Insurance & Letters of Credit - As ever with insurance you are paying for someone else's mistakes. If you can bear the expense of being charged a percentage on every transaction, and your industry is considered a 'safe risk,' then it has its place, especially when trading with the emerging overseas markets. Otherwise, taking the above mentioned steps in conjunction with the measures recommended in stages 2 and 3ought to provide sufficient protection. So far as Letters of Credit are concerned - over 50% of them fail on the first presentation. The cost of putting in place a guaranteed letter of credit may well render the transaction a commercial nonsense.
All of these steps are little more than common sense but frequently overlooked. Ensure that your company has clearly defined procedures and that they are adhered to and you will probably avoid disappointment.
Always remember that your standard terms are your contract to supply - the rules of contract law apply. It is therefore important to ensure that your terms are current, enforceable and comprehensive. Having them drafted by a specialist lawyer and reviewed regularly is always the best way of ensuring that your contract terms provide for the best business protection.
Broadly, your terms ought to achieve the following objectives:
you trade within
In non EU countries simply add late payment penalties into your contract terms. Even if you do not wish to enforce them it is a useful bargaining tool when it comes to getting paid. Use them as both a carrot and a stick.
Clauses providing the right to claim interest and fees can be incorporated into the contract and, when they are, the late payment legislation will not apply.
So when is payment late?
Where there is an agreed credit period, and the supplier has agreed, either in writing or orally, a credit period with the purchaser, the payment is late if it is made after the last day of the credit period.
If no credit period has been agreed, then the LPCD(I)Act 1998 sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed.
The 30 day default period starts running from whichever of the following is the last in time:
This is very brief guide as to the areas your standard terms ought to address. It is always advisable to have your contract drafted by a specialist lawyer and reviewed at regular intervals.
The final part in this series of three deals with what happens when all these careful and meticulous measures fail: Lawyers & Debt Collectors.
If all of our carefully prepared measures as set out in parts 1 and 2 of this series have failed then it is time up to move to stage three and consider third party intervention. By 60 days your credit controller ought to know whether there is a good reason for non payment. If not then the intervention of a third party should be considered at this stage. If there is some legitimate reason for delay seek to resolve it immediately as the longer it remains unpaid the less prospect there is of a successful recovery. A further reason for early use of a third party is price. Good agencies offer reductions for early referrals as they are usually easier to collect.
LAWYERS v DEBT COLLECTORS
Rocks and hard places spring to mind here. However there is something to be said for both (here I confess that I am both and no, I don't get invited out much).
Debt Collectors - The principal advantage they have over lawyers is that they do not charge hourly rates. Most will work on a no win - no fee basis with commissions payable out of sums recovered. Most debt collection agencies (DCAs) are thoroughly respectable and hard working, but there are small minority who are not. Here is a checklist of what to look for when instructing a DCA:
Many law firms now offer to write debt collection letters on behalf of their clients in return for a small fee. That is fine as far as it goes but unfortunately it doesn't usually go much further than that. The next step is the option to issue proceedings on your behalf and to prepare the case at their usual hourly rates. They do not usually have the systems in place to chase accounts and resolve issues. Most good debt collection agencies have teams of experienced collectors trained to collect money quickly without the necessity of going to court.
There are however advantages to instructing lawyers, not the least of which is that it should ensure a minimum standard of quality. The lawyer who takes your case should be at least competent and if not, they are answerable to the Law Society. Again, there are a number of things to look for when choosing a lawyer.
Generally there is no hard and fast rule as to whether a DCA or a lawyer will be the best option. For basic debt recovery a DCA is usually be the cheapest option and provided that you ensure have engaged a good and reputable agency. Lawyers are more expensive and tend to charge win or lose. The obvious solution might be to use a DCA with a litigation department to limit the costs and save the lawyers for the highly specialist and complex cases.
Whatever you decide to do it is important to act quickly and seek third party assistance as soon as it is apparent that your internal procedures have failed. I hope that this short series has been of some interest and wherever you trade you don't need to call upon us too often.
This article was originally published in Communicate - the Association of Translation Companies' newsletter - www.atc.org.uk
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