Effective debt recovery enables a business to operate with the working capital needed to pay the bills, and trade without the pressure of poor cash flows. Some debts can be very difficult to collect, however, and may leave business owners considering the prospect of legal action.

This is why it’s essential to carefully review all debt recovery measures within a business, and where necessary, put in place an effective system before it becomes a significant issue. The costs of litigation can be considerable, and any legal action must also be weighed against the size of each debt, explains Keith Tully of Real Business Rescue.

What types of cost are incurred during litigation?

A creditor may have to pay the legal costs of taking their debtor to court, and also the in-house debt recovery costs leading up to that point. These can be substantial considering the time it takes to chase payments, and the indirect cost of distractions and loss of focus when trying to run a business.

So how can business owners mitigate these costs and issues, and pre-empt the financial and operational damage caused by late payments?

Check terms and conditions of trade

The Late Payment of Commercial Debts (Interest) Act, 1998, also known as the Late Payment Act, allows for the inclusion of a costs recovery clause in a business’ terms and conditions.

For business-to-business debts, it enables organisations to:

· Recover £40-£100 on every invoice that’s paid late

· Claim interest on outstanding amounts at a rate of 8% above the Bank of England base rate, as long as a different rate of interest isn’t stated in a contract

· Provide for the ‘reasonable’ cost of chasing a debt in-house – this would include the resources and time spent trying to recover the debt

Instruct debt recovery experts

Working with a debt recovery specialist is an efficient way to recover debts, and means the business owner can give their full focus to day-to-day operational issues and strategic plans. Debt recovery experts have the knowledge and expertise to implement a range of measures as appropriate, such as negotiating a settlement if it’s in the best interests of the creditor.

Implement a credit control and debt management plan

A plan for effective credit control and debt recovery starts with credit-checking new customers, and obtaining trade references where applicable. This is a vital process that helps to protect the business from bad debts, and provides a foundation for smooth trading.

A credit control and debt management policy might include:

· Clear terms and conditions of business within individual contracts, invoices, reminders and other official documentation, as well as on websites – including the late payment clause mentioned earlier, with the late payment fees and interest rate that will apply clearly stated

· Regular credit checks of existing customers so that the business is aware early on if their customer’s financial situation declines

· A consistent and proactive system for chasing late payment at regular intervals, whether by phone, email, or letter

Considerations for debt recovery vs litigation:

Statute barring may prevent debt recovery

In England and Wales, some debts are statute barred after six years under the Limitations Act, 1980, depending on certain conditions. This means they can’t be enforced through the courts due to the time that’s elapsed. The system differs slightly in Scotland, where The Prescriptions and Limitation (Scotland) Act, 1973 comes into play.

Costs of debt recovery

Even if a court Judgment is made in the creditor’s favour, there may be further costs required to enforce it. These might include an attachment order, for example, or an instruction for bailiffs to seize assets to the value of the debt. A further consideration is whether the debtor is insolvent, as there may be no benefit in pursuing the debt if there are very few or no assets available to sell.

Is the debt proportionate to the costs of litigation?

The value of the debt may not be sufficient to warrant litigation – whether the cost of taking legal action is proportionate to the size of the debt is an important consideration before proceeding.

Not following the correct procedure can be costly

Failing to exhaust all pre-litigation actions can be costly for creditors, and they may even incur a fine from the court. Actions include, but are not limited to, communicating with the debtor more than once about the overdue amount, and placing a hold on their account so no more work is carried out until the debt is settled. Making sure not to harass the debtor during the course of debt recovery is also an important factor.

Efficient debt recovery procedures can help businesses to avoid costly litigation and poor cash flow. Not only does the business run more smoothly when the expected monies come in without delay, it facilitates the business’ growth and development.