Can SMEs afford to recover debts?

From this week SMEs wanting to pursue recovery of a debt of £20,000 or more through the civil courts will have to pay an advanced fee of £1,000 or more.

The fees for civil courts have been increased by an estimated 600%, on a sliding scale calculated at 5% of the value of the amount claimed.

The payment has been increased by more than the actual cost of court action and is therefore called an “enhanced” fee.

The worry is that debtors will have even less incentive to pay what they owe if they suspect their creditor cannot afford the court fees to recover debts.

SMEs would be well advised to take even greater care to protect themselves when taking on new customers. For B to B services it is always advisable to check the credit history of a potential business client and be very clear on the wording of any contract.

Businesses should also check the small print of any credit insurance they might have. They need to know the cost of making a claim in addition to that for the credit insurance as claims normally require proof of default such as getting a court judgement and enforcing this before being able to make a claim.

This also may justify factoring where the finance provider normally collects the debts, although beware any recourse clause that allows them to transfer uncollected debts back to the company.

For both B to B and B to C businesses it is also advisable to review credit risk and terms such as deposits, significant early payment discounts and security including personal guarantees should be considered. Why wouldn’t a personal guarantee be provided if the client’s intention is to pay the debt?

A supplier of goods to Viper Guard, my vehicle parts company, offers a 30% discount for payment within 30 days. They always get paid on time.

While final approval was passed in the House of Lords last week, it is expected that the Law Society and other lawyers’ representative bodies will seek a judicial review of the legality of the new charges.

One Response to “Can SMEs afford to recover debts?”

  1. Anton Smith

    Good article. I would add:-

    1. Razor sharp and tenacious credit control.

    2. In industries where retention of title works, publicise the fact that the goods are subject to ROT. On a construction site arguably every contractor on site needs to know that goods are subject to ROT even before they are unpacked so that they are on notice of that fact. Easier said than done though.

    3. Get to the bottom of any purported dispute or grievance ASAP, possibly with legal advice; do not put it to the bottom of the pile as “too difficult”. Older debts are harder to collect successfully.

    4. Where appropriate/feasible hit hard and fast with a solicitor’s letter threatening winding up in the event of non-payment, if necessary seeing some of them through to a winding up order to set a precedent that is known in the relevant industry.

    5. Make sure the contractual paperwork is all in order. Signed account opening form with T’s n C’s accepted, signed purchase orders, signed delivery notes, invoices, chaser letters/emails. Everything addressed to the right company etc.

    Reply

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