by Stuart Hoysted, senior associate and debt recovery technical director at Clarke Willmott in Taunton

The economic turbulence of recent weeks suggests that now is the time for SMEs and sole traders to review their debt collection activities.

With interest rates rising and energy bills going through the roof, there has been a large increase in the number of corporate insolvencies. There is a very real prospect of recession and all businesses – particularly SMEs and sole traders - should be looking at their debtor situation.

It’s wise to act now before today’s collectable debt becomes tomorrow’s bad debt.

Why SMEs?

The current financial climate could hit SME and sole traders particularly hard. Increased costs and the typical customer base of these businesses mean they tend to be more exposed to the current turmoil.

Also, far too often the committed small business owner is too busy looking at servicing current contracts or preparing for the next project. There is a general mindset that the collection of older bills will wait until there is a spare moment when they can chase.

Very often that spare moment never arises, and with the current financial climate, all business owners need to put time aside to consider outstanding customer payments now.

Over the past few years there has been an explosion of resources (QuickBooks, FreshBooks, Zoho etc.) available to the smaller business owner, to assist them with the billing processes at a cost. If you use one of these software packages, you will know what a godsend they are in issuing invoices and sending overdue reminders to customers.

But what if you do not use one of these packages, or if you have reached the end of the software’s chasing process and payment is still outstanding?

A telephone call to the customer is a good place to start. This can help you to understand why your invoice(s) have not been paid and perhaps work out a solution for receiving payment.  

It is impossible to list all possible reasons for non-payment, or all the tactics you should employ, but some common examples include:

Invoice (and reminders) have not been received

This could be as simple as having your customer’s email address wrong, or your customer having a filter which has placed the emails straight into their spam folder.               

You should be able to re-send the invoice to your customer while they are on the phone so they can confirm receipt immediately.

A dispute over the goods or services supplied

It is surprising how many disputes are not raised until you contact the customer.

Even if the dispute is totally fabricated, knowing that the customer considers they have a dispute allows you to consider your options. This might mean offering a resolution to the customer, even if it is offered through gritted teeth, just to obtain payment. Once it is received you are then free to resolve not to work with them again.

If you are not able to reach a resolution, showing you have attempted to be reasonable may help if you if you subsequently decide to issue a County Court Claim.

We are experiencing cash flow problems/I am waiting on payment from my customer

It is not your responsibility if your customer has failed in their own collection processes, but somehow your customer believes that you should suffer the consequences equally.

You will need to remind your customer of their responsibilities to make payment and ask them for more information as to when they expect to be paid. Knowing this can allow you to schedule a follow-up call to be first in line once payment is received.

As cashflow is important, it might also be worthwhile discussing with your customer a staged repayment plan, so that some funds start to come in.

We are winding up/entering bankruptcy

No-one wants to hear that their customer is entering insolvency, but with insolvencies on the rise it will become a more common response from customers.

If you supply goods, and have one as part of your contractual terms, you need to act on any retention of title clause.

In all other cases you will need to lodge the debt in the insolvency estate. Anyone who has had a customer go through insolvency will know that you may have to wait years before a distribution is made - if at all. Any payment received is only likely to represent a few pence in the pound of the actual debt.

If after calling your customer payment still does not materialise, then it is time to consider pursuing a claim through the Civil Court. If the amount concerned is under £10,000 then this can be processed through the HM Courts & Tribunals Service Money Claim Online service (MCOL), which is a relatively simple and intuitive method of bringing a County Court claim. 

Alternatively, you can engage solicitors to pursue the claim on your behalf.  

Clarke Willmott is a national law firm with offices in Taunton, Southampton, Birmingham, Bristol, Cardiff, Manchester and London.  

For more information please visit Clarke Willmott - Specialist Debt Recovery Solicitors – Clarke Willmott