What a wonderful world it would be if every time you tender an invoice for the goods or services you supply, it was paid immediately. If you live in that world, lucky you! The reality for many businesses is a long way from that.
Chasing customers for payment can be an immensely time-consuming exercise and, in extreme situations, a lack of cash can even put the viability of a business at serious risk. This article looks at some of the reasons why businesses – particularly SMEs – in all commercial sectors and professional firms, encounter bad debts and how to resolve them effectively.
Firstly, we need to consider why some customers don’t pay.
1. Is it because they simply have no money?
There are simple ways to avoid this problem. Online credit checking services can give you access to enough information to ascertain if someone has the funds to pay you. The right time to do this is before you commit yourself and are committed to incurring costs.
Alternatively, deliver interim invoices. If they are not paid promptly, you can consider capping your exposure by not making any further supply until what is already due has been paid (provided you have not already committed yourself to complete the job regardless of when payment is to be made).
2. Does the customer have a complaint about the goods or services supplied?
This may be a challenge to your customer service skills but, from experience as a lawyer who gets involved at a later stage, it is far better to make every effort to resolve the complaint (even if it costs you a little to do it) than to ignore it and hope the customer will back down. This is especially so where the complaint is relatively minor, but a substantial amount of money is being withheld until it has been dealt with.
Of course, if there is no substance to the complaint and it is merely a tactic to delay payment or negotiate a discount, by dealing with the issue promptly, the customer runs out of excuses for not paying much sooner.
3. Have the parties made it clear between them what they are agreeing?
Recording in writing what has been agreed will help to avoid such problems, but even then, arguments at a later stage about what was intended can arise and all too frequently do.
So far, so straight forward. But if you’ve done everything right (of course, it’s always the other person’s fault…of course it is…) and you still have a dispute, what are you going to do about it?
Well, litigation (court proceedings) is very much a last resort option. Unless you need an urgent court order to compel someone to do something or stop them from doing it, you are expected to behave ‘reasonably’ and try to reach a resolution before issuing a claim at court. If either party does not follow the appropriate protocol (there are specific steps required to be taken in some cases) before a claim is issued at court, then the court can impose sanctions (usually financial) on the party in default.
To comply with the protocol, you are expected to set out the legal and factual basis on which you have a claim in a detailed ‘Letter of Claim’. The other party will then have anywhere between 14 days and 3 months to respond to the Letter of Claim, depending on the nature of the dispute.
The parties are encouraged to share relevant documents to support what they say. Also, the parties are encouraged to meet to discuss a resolution. Where there is tension between the parties, those discussions may be conducted via a mediator (an independent person who is trained to help parties engage in settlement discussions where they might find it difficult to meet face to face).
The potential benefits of following the protocol, namely resolving the dispute and avoiding the costs of litigation, and the potential risk of sanctions if you don’t, it would be wise to seek the advice and guidance of a specialist lawyer to ensure that you get it right.
In the meantime, we can all dream of a utopia where customers always pay their bills.
