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Accountant’s Small Business Debt Recovery Advice

However tight you believe your credit control system to be, however you invoice – monthly, quarterly or by Direct Debit, there is always the possibility of customer default.

Many businesses believe that by agreeing invoices in advance, ensuring that the terms of agreement letter confirms the method and date of payment (with monthly payments being the norm) that default is kept to a minimum. However, there will always be one customer that proves to be a debtor too far.

Taking a customer to court is a relatively straightforward process, but be aware that the preparation, mediation and attendance at court could mean that it costs you more in time than the debt itself. The procedure must not be seen in isolation but as part of your firm’s overall debt recovery procedure.

Debt recovery procedure

If there is a written procedure in place then you are more likely to adhere to the process. In addition, if you do end up in court then you will be expected to prove that a due process has been undertaken, including giving the customer the chance to query any item on the invoice and an opportunity to agree a payment schedule.

You should consider:

  • Including a paragraph in your Letter of Engagement or Terms of Agreement, confirming your firm’s policy that should payment not be made within a set number of days that ‘further action’ may be undertaken.
  • Including a sentence stating that any querying of fees/charges must be within 21 days of receipt of the invoice and in writing.
  • Although you might not be mindful to, try ringing the client to see whether there is any reason for non-payment (illness etc).
  • Send a statement after a set number of days has passed. If there is still no response, send a reminder, then a recorded delivery letter enclosing the statement. The actual invoice and reminders can be by email, but a recorded delivery letter will prove to the judge that the statement reached the client and, importantly, that the service address is correct. (Simplydocs https://simply-docs.co.uk/Home has useful template letters that can be sent with the final statement prior to taking further action.)
  • In your final letter to the debtor you can include: “We have not yet levied any late payment or interest charges to the amount overdue which we are entitled to do under “The Late Payment of Commercial Debts (Regulations) 2013” as payment is overdue by 60 days. However, should full payment not be received within the next seven days we may add these charges to your account and consider taking further action to collect the debt”.

Time for action

Time for action

If there is still no response/payment, you will need to consider your next course of action which may include one or a combination of the following:

  • Solicitor’s letter
  • Debt collection agency
  • Apply for CCJ using form N1 (available online – court fees are cheaper).
Solicitor’s letter

I’ve always found that such a letter indicates to the customer that you mean business. A letter obviously costs, typically £50+VAT, however if it doesn’t work and you still end up in court then it will have been a wasted cost that is not claimable even if you eventually win.

Debt collection agency

Using a debt collection agency means that the process is taken out of your hands into the hands of experts who will be businesslike and not be swayed by any story as to why payment hasn’t been made.

They charge a set initial fee which covers the issue of at least two letters/phone calls and, if still no response, a visit. At this stage they have no further powers (eg to take possession of goods) unless they are registered bailiffs and a court order has been issued.

CCJ application

If they are not successful in collecting the debt then the next action is to apply for a CCJ, the cost of which depends upon the amount of the unpaid debt. The fees start at £25 for a judgement below £300 (for an online application – payment is higher should the application be made on paper) and the scale of costs can be seen at: https://www.gov.uk/make-court-claim-for-money/court-fees

Application is online via the Government Gateway; if the defendant does not respond and the claim was issued online, ‘judgment by default’ can be requested.

Other points to consider with debt recovery

  • It is worth sending a recorded letter to the customer prior to applying for a CCJ, pointing out that should a CCJ be awarded then their mortgage provider will be aware.
  • The form asks you to indicate at which court you would prefer the case to be heard. Do not bother suggesting a court local to you or even one halfway, as it will always be at the defendant’s local court.
  • You can apply to either a county court or High Court for hearing if the debt is between £600 & £5,000.

How much debt to claim

As indicated above, ‘The Late Payment of Commercial Debts (Regulations) 2013’ allows the claim to include interest, statutory recovery fees and costs of the debt collection agency, if used. If you win, then these amounts are automatically included in the final amount plus any expenses incurred in attending court (eg petrol and accommodation costs).

The application costs increase substantially at £3,000 or above – be aware that this amount comprises total costs and not just the amount of debt.

Business Mediation

When applying for a CCJ you will be asked if you are prepared to enter into mediation.

Read our blog on business mediation

Many businesses take the view that if you do not agree to mediation then the judge might not look favourably on the case, as you would not have done all you could to settle the case amicably.

On the other hand you have done the work, you have done nothing wrong, the invoice was fair, you have waited to be paid, the client is aware that payment would be due and when, they have been given enough opportunity to pay so why mediate? If this is a path you choose to go down, remember you are not mediating on a reduction but on how the debt will be paid.

Court papers

If the client disputes the claim and mediation does not work resulting in a court hearing, the details of the case will need to be supplied to the court prior to the hearing. Remember that the judge will not have time to wade through pages and pages of documentation.

Present the text using bullet points. Start by including the outstanding invoice, detailing dates etc of any phone calls, emails or letters. Mention mediation if this has been undertaken. At the hearing you will only be asked questions should the client appear to defend themselves. If they do not attend then judgment is automatically awarded to the applicant.

And if they still refuse to pay?

Place the debt in the hands of the debt enforcers. They will do the hard work for a percentage fee and their success rate is over 98%. If the court awarded in your favour then every time the enforcers attend the cost payable by the defendant increases, so the cost to you is nothing.

Final Small Business Debt Recovery Advice

You might be pleasantly surprised and find that just the threat of court action often produces payment, but if not then be mindful of the time and effort it will take to take the matter further. The first time it will take time learning the process etc, but after you have done it once the feeling of satisfaction when finally obtaining payment makes it all worthwhile.

Image of David Jones Shrewsbury Accountant and Founder of Morgan Jones

If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.