By Gemma Newing, Head of Dispute Resolution at Rooks Rider Solicitors
“64% of SME business owners fear late payments could result in their businesses failing”
“During the first two quarters of 2021, corporate insolvencies increased by 31% to 3,334”
Many of the headlines we are seeing daily as we emerge from the pandemic paint a rather bleak picture of the future of businesses in the UK.
Statistics for 2020 (pre-pandemic) show there were around 6 million small and medium sized enterprises (SME’s) with under 250 employees.That would equate to around 3.8 million SME’s fearing for the viability of their business in the months ahead.
With SME’s contributing around 47% of revenue to the UK economy, and employing approximately 16 million people, which equates to 60% of the UK’s work force, the statistics are alarming.
Given all of this, it’s of little wonder that businesses are asking how to protect themselves and avoid becoming an economic casualty.
What can businesses do to protect themselves?
The age old saying of ‘cash is king’ is as pertinent now as it has always been. If a business is to remain financially healthy, it needs to maintain strong control over its cash flow. All businesses, regardless of their size, should exercise the following procedures:
- Have a contractual agreement and terms of business in place with your customer/client.
Set out very clearly the terms on which you are doing business. If problems arise, you will want to place reliance on this.Take time to get the foundations in place to protect your business.
You should set out the details of when invoices are to be paid, and if there is a delay, state whether interest is to be charged and at what rate.
- Raise bills to clients/customers throughout the month – this will greatly assist your cash flow.
- Stipulate on your bills (and your terms of business) when you send a reminder – if the payment deadline has been missed, engage with your client/customer to establish when payment will be made.
- If payment is not made promptly, take action. Waiting will jeopardise your prospects of getting paid.
What action can be taken in the case of unpaid debt?
Having bad debtors is not a novel concept.Businesses of all sizes have always had problems recovering money. That said, late payments and invoices going unpaid altogether, are more prevalent when there are economic downturns as payers delay payment to improve their own cash position.
It is said that around 96% of SME’s have experienced bad debts; a figure which cannot be ignored. If you are in a situation where a client/customer is not paying you, do not wait. Prompt action is key.
One such way is to threaten the commencement of Court proceedings; sending a Pre-Action letter of claim, demanding payment of the outstanding sum. Within the letter, you should set out (i) the amount you are seeking recovery of (ii) any interest, and (iii) the date when you expect payment to be made.
If payment is not made by that deadline, then you will commence Court proceedings for recovery. If a business is trading successfully, and it wants to remain that way, often the threat of proceedings is enough to prompt payment.
If payment does not materialise, carrying out some pre- litigation checks are advisable.
-What is the financial position of the debtor looking like?
-Would they be ‘good for the money’ if Judgment were obtained against them?
If those checks are favourable to you taking action, then Court proceedings can be commenced with a view to obtaining Judgment against the debtor. A Judgment has a negative impact on the debtor’s credit rating.
We reiterate once again that the importance here is do not delay. If you delay in getting payment, you risk being placed at the back of the queue when it comes to payments being made by the debtor. The knock-on effect could mean your business risking financial difficulties.