The Problem Many companies in the hospitality sector are plagued by the problem of late payment. Ensuring that customers pay their bills on time can be a difficult issue to tackle, especially when the regular offenders are large companies that account for a significant proportion of your revenue. For smaller, owner-managed businesses where cash-flow is vital, this problem can have fatal consequences, with one in four insolvencies being directly or partially a result of persistent late payers.
The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses the statutory right to claim interest on late payments from their customers. If a customer has failed to pay a bill within your agreed credit period (or within 30 days, if you do not have one), you can charge interest at the Bank of England base rate plus 8%, which at the moment would equal 12.75%. Businesses have six years in England, Wales and Northern Ireland, and five years in Scotland, in which to make the claim.
Businesses have the right to claim debt-recovery costs ranging from £40, for debts of less than £1,000, to £100, for debts of more than £10,000. They can also challenge "grossly unfair" contractual terms - for example, a customer trying to reduce the rate of interest charged - or increase the length of time they have in which to pay.
This legislation can be helpful; but, in reality, a small business owed a large sum generally needs the money now, rather than later with interest. Interest charges are also unlikely to deter the serial late payer.
Despite being introduced with the best of intentions, the act has had minimal impact. A recent survey by MacIntyre Hudson found that fewer than half (43%) of the UK's owner-managers are even aware of the legislation. Only a tiny number (3%) have actually used it, and even fewer (2%) say it has helped overcome the problem of bad debt.
Therefore, companies should adopt a "prevention is better then cure" approach to late payments. The most effective way for businesses to pre-empt problems is to have clearly agreed terms with their clients and ensure that resources and systems are in place to chase down debtors and recover payment.
Businesses should look at the following strategies to combat late payment:
Terms and conditions should be clearly written and agreed by customers from the start to avoid any confusion on either side.
New customers should be credit-checked using a credit-referencing service to assess their financial risk. This will give you the critical advantage of knowing more about those you are doing business with.
Ensure you have an effective credit-control system. If you don't chase unpaid bills effectively, customers may be unhappy to be asked to pay interest. This may require extra resources but will be worth it in the long term.
Foster good relationships with customers. Be firm, but fair.
Consider offering a discount to customers who pay promptly.
Think about introducing a system of part-payment - asking high-risk customers for an advance.
Consider hiring a factoring company, which will pay a fixed proportion of invoices within a prearranged time, then chase debts for you, paying the balance of the invoice minus its charges once customers pay up.
Using a debt-collection agency can save you time, but you will have to pay 8-10% commission. Be sure to check that it is registered with the Credit Services Association.
Businesses should never threaten legal action unless they are prepared to follow it through. Taking a customer to court to recover payment should always be regarded as the last resort, only to be adopted if all else has failed. You should always seek legal advice before starting proceedings. Companies should consider whether legal action will be cost-effective, as in some cases it may be cheaper to write off small sums.
- Get your terms of trade right and ensure that customers are aware of them.
- Credit-check potential customers.
- Ensure you have an effective credit-control system in place.
- Be clear about your legal position.
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For MacIntyre Hudson's credit referencing service, Credit Assist, visit www.macintyrehudson.co.uk or call 01494 790614