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Small Business Debt Recovery

Sep 21, 2019 Red Flag Alert Updated On: May 24, 2023
Small Business Debt Recovery | Best Practice

Almost half a million businesses started 2018 in significant financial distress, and potentially 2018 looks set to be another challenging year for the UK economy. In Q1 2018, 32,000 CCJs were issued against British businesses – up 7% from 2017. 

Bad debt is a key contributor to the problems faced by small businesses:

  • 50,000 close each year due to late payments.
  • Only 30% of businesses say all invoices have been paid on time.
  • 35% are waiting over a month for invoices to be paid.
  • £50 billion is locked up in late payments.

Figures courtesy of Hitachi Finance

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For small businesses, it’s important to have slick debt recovery processes. Let’s take a look at seven tips to recover debt and some ideas on how to avoid debt in the first place.

Triage your Debtors

Broadly there are two types of debtor: businesses that are generally honest and not paying because of cash flow issues or bad organisation and less honest businesses that are delaying, or worse, never intending to pay.

You need to treat these situations very differently. If one of your clients is struggling to pay because they have an issue or they have simply forgotten, a less formal approach is likely to work fine. A gentle reminder that payment is important will usually prompt action. If they are having serious cash flow problems you should uncover what these are and work with your client to get paid quickly (e.g. a payment plan may work well).

If the client is trying to avoid paying, then the above tactics probably won’t work, and you will need to ramp up your approach to a more formal process involving letters, courts and debt collection – more on this later.

Write a Process

Chasing debtors can be very frustrating, stressful and time-consuming, especially if you’re working on multiple debts at one time. You should have a clear process for debt management which outlines:

  • Who will take action
  • When they will take action
  • What the action will be

Formalising the process has a couple of advantages: it ensures you consider the best way to approach bad debt – this varies a bit between industries, it gives you an immediate protocol to follow which should relieve stress, and it keeps you organised. Hard though it is, chasing debt should be seen as a business function like any other aspect of a business – try not to get sucked into the ethics and be dispassionately efficient in delivering the best process to claim the debt.

Pick Up the Phone

This can work whether your debtor is honest or dishonest and if you’re not sure, it should help provide an answer. It works well for several reasons:

1.      If you are in a line of creditors then, all else being equal, the ones who shout               the loudest will probably get paid. By picking up the phone you will seem very             real to your debtor, and they will want to avoid awkward calls – so you may get           paid rather than the person who sends the odd email.

2.      It helps you build a relationship; your client is likely to be appreciative of you               showing empathy and a willingness to work with them. This can have other                   business benefits like more trust and more sales.

3.      By reiterating that your business needs money to pay bills as well, it will                        humanise the process; most people will naturally feel awkward about creating             problems for you.

4.      During a phone call you can make an additional judgement on the situation,                 maybe the person you’re speaking to sounds distracted or nervous. This may                help build a picture of the business you’re dealing with and provide ideas for                your next step.

Make a Court Claim

If it has got to the stage where you need to take formal action, one option is to claim through the County Court (commonly referred to as the ‘small claims court’). There are a few points to bear in mind before doing this:

  • Make sure you’ve ruled out other avenues first because although the process is fairly simple, there is a cost and it takes a bit of time.
  • There is an option to make your claim online, and this is a little bit cheaper.
  • If the defendant denies owing you money there will be a hearing, which sounds intimidating but should be fairly straightforward. If you have solid evidence you are likely to win the ruling; the judge won’t have hours to spend sifting through information, so keep it simple.
  • The debt is enforceable by the court but be aware that if the defendant doesn’t have any assets, it may be very hard to get paid.

Debt Collectors

Debt collection agencies are expensive; fees can be 50%+ of the debt. However, if the debt is lingering, and with a chance of default, this can be a good option.

Debt collection agencies have a clear process, understand the legal landscape and employ a range of tactics for collecting payment. The psychological effect on debtors of using an agency can be helpful – once a debt is with an agency, it’s clear that the situation has ramped up and this often prompts payment.

There are a few points to consider before hiring a debt collection agency:

1.      Do they have experience in your industry and with the type of debt you need                collecting?

2.      What accreditations do they have? At the very least, check they are regulated               by the FCA. Membership of the CSA, Investors in People and ISO 9001 are all                positive signs.

3.      What tactics do they use? Some can be aggressive, which could affect your                    relationship with the debtor.

4.      How does the agency interact with you?

5.      What are the fees?

Understand the Basics of Insolvency

If one of your debtors becomes insolvent, that’s pretty bad news – it can’t hurt to understand a bit about the process – the Insolvency Service has an overview.

Commercial Insolvency is when a company can no longer meet its financial obligations; there are legal procedures under the Insolvency Act 1986 that govern the range of options for insolvent companies, these are:

  • An informal agreement may be reached with creditors.
  • A Company Voluntary Arrangement (CVA), where a plan is put in place to repay part of the debts owed.
  • The company is placed into administration where a third-party administrator takes charge and attempts to extract as much value as possible from the remaining assets to repay creditors.

None of these are positive for you and, ultimately, if there are no assets then you’ll probably end up with part payment or no payment at all.

Prevention is Better than Cure

Being in a situation where you need to recover debt is sometimes unavoidable, but in most cases you can put processes in place to prevent the need to do this. Here are a couple of key tactics.

Find the Right Customers

Using the Red Flag Alert database you can build marketing lists which segment businesses using over 40+ filters. A key filter to search with is financial health rating – this rating is updated every day using the latest available information and gives a clear view on the likelihood of the business facing insolvency. You can ensure that marketing lists exclude businesses that have poor financial health.

Onboarding Customers

When a customer comes onboard, set credit terms in line with the financial health of the client. Some businesses will be on the borderline of meeting your criteria; for these businesses more stringent credit terms can mitigate your risk.

Red Flag Alert allows you to integrate this data into your CRM, so these decisions are efficient.

As part of the onboarding process you should collect key information on your client and set clear expectations:

  • Who is the point of contact?
  • What are the best ways to get in touch?
  • How do they pay invoices?
  • Be clear about your invoicing process and sanctions for missed payments.
  • Give the client a named person they should contact in case of problems.

To find out how our Onboarding capabilities can help your business, why not get a free trial today?

Published by Red Flag Alert September 21, 2019

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