7 Top Tips on how to Avoid Getting Bad Debts

Andrew Athineos, Managing Director of Athena Collections, provides some insight and tips for collecting debts during this period of ongoing uncertainty.

Long before lockdown measures were imposed in the UK on the 23rd March 2020, the economic climate had been suffering. The UK faced uncertainty following the confirmation that Brexit would be a reality and now the deadline to leave has been and gone. If that wasn’t enough to make industries nervous, we faced yet more challenges for businesses with the pandemic showing its true force. To this day, the knock on effect is still unknown in terms of what the end result and final impact will be for the future of the UK economy. Many businesses were forced to scale back, furlough (the infamous new word) or shut down entirely. Add to the mix the Ukraine conflict, cost of living and energy crisis and most recently interest rate hikes to keep inflation under control which ultimately has led to the knock on effect to mortgage rates, it appears to be the calm before the storm in an economic sense however any sane person could hardly call it ‘calm’.

Enough of the doom and gloom, however it must be said we are currently facing truly exceptional times and we are often asked whether it is appropriate or inconsiderate for a business to ask for payment of their debts as if nothing ever happened.

In short, it is never inappropriate or inconsiderate to ask for payment if goods and services have been provided in accordance with the contractual terms/agreement. When we say 'contractual terms/agreement', this doesn't mean some fancy 100 page contract - it simply means an agreement between two parties whereby it is agreed that Party A provides goods/services to Party B in exchange for a monetary sum.  That said, due consideration should be given whether the relationship has irrevocably broken down or assuming the customer is keeping open lines of communication then both parties should try to work through this together as ultimately, we are going through this together.

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Having said that, there will always be businesses, individuals who will try to abuse this forbearance and therefore it makes it difficult for the creditor to know who is being truthful and who is not and that relies on the relationship between the parties.

In the event goods or services were provided then it could be argued that ‘what is good for the goose, is good for the gander’ and therefore if a contract is entered into or service is provided then it should be honoured otherwise it could be assumed that the business or individual continued trading whilst being insolvent.

Repaying debts in full at the moment and on time may seem like a pipe dream but it is imperative that companies have multiple layers of processes in place to ensure that any non or late payment is caught early on to ensure that open dialogue is commenced. Businesses should not be discouraged from asking for what would be rightfully theirs.

It is inevitable that thousands upon thousands of businesses will face insolvency and with that debts will increase and in turn, a domino effect. Action needs to be taken at an early stage to ensure you are at the front of the queue.

Here are some of our tips on how to avoid getting bad debts:

  1. Ensure invoices go out on time, do not leave it a second longer than it should. Consider bringing in your payment terms if possible but with the impact it could have on your customer in mind.
  2. Follow up at least 7 days before the invoice is due to ensure it has been safely received and there are no queries and try to get your customer to commit to a payment date. Most companies will have weekly or monthly payment runs. You do not want to miss the monthly run to only find out you have to wait another month to be paid which then puts your cash flow under pressure. Remember it's your payment terms they agreed to when entering into contract with you!
  3. It should be assumed that you will be paid in full but never assume, find out early on as mentioned in point 2 what the intentions are. If your customer can’t pay in full then agree written payment terms. This does two things a) it provides admission in writing b) confirms the agreement so there is no ambiguity if later down the line a default occurs.
  4. Keep in constant touch with your customers: In recent times, big household names have fallen by the wayside because cash reserves have been depleted leaving them and the creditors vulnerable. Look out for the early signs. If they do not pay as per the agreed terms, then don’t be afraid to put the account on stop or switch to payment on account. It makes no commercial sense to allow the debt to get bigger when it is evident they cannot sustain the current situation so, carefully monitor them.
  5. Depending on the size of the transaction, consider asking for additional security in the form of a deposit upfront, personal guarantee or lien over goods but ensure you do your due diligence to ensure the person has the means to pay if their company cannot do so.
  6. Act fast; don’t let a debt fester as it will only get worse. Have the conversation and stand your ground. If there is a deadlock situation then try and resolve it amicably but ultimately it must be on your terms and for the good of your business. If you cannot come to an agreement then consider additional action such as employing the services of a debt collection agency or issuing legal proceedings as a last resort. Typically a 3rd party approach may have the desired result because it puts some distance between you and the customer and takes the emotion out of the equation.
  7. Do not make empty threats; If the relationship has broken down and is irreparable then consider what it best for your business and take action but do not say that you will do something and not do so, unless there is good reason not to, otherwise you lose all credibility and therefore anything said thereafter is not likely to have the desired effect. Rest assured if you do not take action someone else will.

Hopefully, this gives some food for thought and feel free to contact us at contact@athenacollections.co.uk  if you would like to discuss any case in particular and how we may be able to assist you.