According to risk manager Atradius in its October 2018 Payment Practices Barometer, the UK has the highest proportion of overdue invoices in Europe at a staggering 48.7%. The next worst is France at 47.45% followed by Switzerland at 46.5%.
Those wanting prompt payment ought to relocate to Denmark where overdue invoices stand at 32.65% or the Netherlands, which has just 34.55% of invoices overdue.
The problem for print, when dealing with late payments, is what to do to speed up the process.
Philippa Dempster, managing partner of law firm Freeths, thinks debtor days are being pushed out for a number of reasons, notably, “electronic invoicing and payment systems, that seem to slow things down as details have to match precisely, and purchase order numbers which cause issues too”.
The difficulty with getting paid
Problems for many are caused by the lack of documentation. Paul Carrotte, head of collections at ICSM, a debt recovery specialist, thinks that print needs to become more guarded with its approach – “industry has moved beyond gentlemen’s agreements. A simple handshake and ‘my word is my bond’ was once enough to seal many a contract between a printer and client, but not anymore.”
And Alex Hilton-Baird, managing director of Hilton-Baird Collection Services, agrees. Experience has taught him that “whether a signed contract, proof of delivery or terms and conditions, it can be difficult to recover payment without proof of the debt”.
A similar view is taken by Dempster. As a lawyer, a good contract goes to the core of excising delays. She advises printers to insert two key provisions into their contracts: a right to suspend further deliveries if there is no payment and the terms have been exceeded, and secondly, that a contract can be terminated if payment is late.
She explains that these terms are critical as the law does not provide a right to cease supply when payment is late – “even if you think that a company is likely to be insolvent, you are generally not entitled to stop performing the contract and if you do, the customer would be entitled to terminate the contract itself and claim compensation”. By extension, Dempster says that businesses that put clients ‘on stop’ are playing a dangerous game if not permitted contractually.
Other useful clauses that Dempster recommends for inclusion are that the undisputed part of any invoice should be paid regardless; there is no set-off so a customer in dispute must pay without deduction and then bring a separate claim; limitation of liability and exclusion of indirect and consequential losses and ideally loss of profit too; and a right to claim interest.
For Hilton-Baird, the key to getting paid is knowing who you’re selling to. He reckons that credit checks, for instance, are vastly underused and says that “businesses should be routinely checking existing customers as well as new customers”. He says that a useful tool for this is an account opening form. Businesses can use it to gather all the information they need at the outset, including contact details of key personnel and company registration numbers, while also getting the customer to agree to and sign the terms and conditions of sale.
The dilemma for firms is that, as Carrotte puts it, new orders are very addictive; he sees that all too often suppliers are too lenient when clients go beyond terms, and they “continue to accept further orders adding to an already overdue account, or provide credit terms that exceed the recommended limits set by credit reporting companies”.
Further, conflict can arise between accounts and sales departments when a large order may have just been received by the sales team from a client whose account is about to be put on stop. Carrotte says that a system needs to be in place to decide whether an order can be processed or not, usually with the financial director or equivalent making the final decision.
Do it yourself?
Dealing with recalcitrant debtors isn’t easy, but the process can be started in-house without the need to call in the professionals.
Hilton-Baird makes the point that there are often instances where debtors can be evasive purely because they can’t afford to pay the sums owed. This is why he says creditors should make contact and “work… to agree a repayment structure that fits – if indeed that is the case. The excuses customers give for non-payment can range from the weird to wonderful, so getting to the bottom of whether they’re genuine is crucial.”
Carrotte agrees with this tack but adds that creditors should remain firm and not become a pushover: “Insist all new orders are paid up front but allow them to pay the outstanding amount over a period of time in small instalments.” It’s not ideal but at least the debt will be paid.
One tip from Dempster is to record payment run cut-off dates: “Many businesses process invoices in the month that they are received and so if you prepare a monthly invoice and it’s received the first few days of the following month, it can often miss the payment run... changing when you send invoices out can make a considerable difference.”
A final notice letter on company letterhead is another weapon to consider. There are many templates to choose from and letters should be delivered with proof of postage or with email read and delivery receipts. The letter should restate what is owed and that it must be paid immediately or by a set date.
Another option noted by Carrotte is a personal visit to the customer: “They may be embarrassed but if you can catch them and speak one to one, it can break the ice and give you the opportunity to gauge their true intentions.”
Bringing in the professionals
But where debts are disputed and have not been resolved within two to three months, then in Dempster’s experience, it’ll have to go legal to resolve it. Before issuing proceedings, she warns creditors to “assess the risk and keep all the evidence. We often use print experts to determine quality issues; the BPIF has a number”.
And action improves payment odds says Dempster. Where debts aren’t disputed over 90% will be paid reasonably promptly if the matter goes legal. But “where debts are disputed, we find that around 60%-70% will get resolved by negotiation before issue of proceedings. Where proceedings are issued, it is rare that the matter will not settle well before any trial. In our experience fewer than 1% of cases will go to trial.”
While it’s true that bringing in a third party adds cost, there are, says Hilton-Baird, two key reasons why clients use his firm: time and expertise: “Investing too much internal time and resource into chasing an invoice means that attention is diverted away from the rest of the ledger.” He adds: “Some businesses simply lack the in-house expertise, and like that they can focus on core business while their debt collection partner collects the invoices they generate.”
Essentially, Hilton-Baird believes that agencies bring a lot of weight to the collections process: “We often receive payment in full within a few days of first contacting the debtor.”
As to the cost, many recovery agents operate on a success fee basis, taking only a minimal upfront administration fee. This, according to Hilton-Baird, “mitigates the risk of throwing good money after bad”. Further, under the Late Payment of Commercial Debts (Interest) Act businesses have the right to compensation and statutory interest on any overdue invoices to help cover debt collection costs.
In Dempster’s experience, few businesses take advantage of the Act or their own terms and conditions which entitles them to charge interest, until the debt has gone ‘legal’. She says, “solicitors will either work on the basis of hourly rates with estimates, fixed cost, or on a no win no fee basis”.
But if the matter is being handed on, time is of the essence. As Carrotte has seen, most “don’t want to upset the customer or are concerned at the cost of doing so. But leaving it too late can mean that other people have already started their own legal action leaving you at the back of the queue or your client has become insolvent leaving you high and dry altogether.”
Often, though, once the matter is passed to a debt recovery specialist, a first stage legal letter might just do the trick. Carrotte says these letters are free to his subscribers if issued online: “Sending these letters shows you mean business and is a further ramping up of pressure,” he says. “Many firms will pay up at this stage or seek terms to settle over time which is better than proceeding to collection and/or legal action.”
Dempster too thinks that a legal letter can work wonders and the advice from a specialist – a lawyer – “can really add a lot of value... They will help you understand what your likely recovery will be and help you negotiate the best deals. I often ghost write letters for the client, that helps your position from a legal perspective as it shows you are serious and will set a timetable to do a deal or go legal.”
Some seasoned late payers won’t ever pay up without further action. As Carrotte points out, “debtors can move address, deny ordering the work, despite the evidence against them”. At this point a debt collector may be needed. There is, of course, no guarantee that a visit from the collector will work; taking the claim to court may be the last, and only, other option.
The law in Scotland and Ireland differs from that in England and Wales but those that follow the court’s procedure (assuming they have a good case) should get a judgement in their favour. Carrotte highlights here that “once judgment is obtained then the fun really starts. Some people don’t realise the power of a county court judgment. It isn’t just a black mark against a company’s credit rating it really does open up the doors to what you can do to get your money back.” (see panel).
The law is a blunt instrument. Despite powers being granted to the courts and enforcement officers, there comes a point when every option has been exhausted - from negotiating payment plans, instructing a debt collection agency and using the legal system – and it’s not possible to recover what is owed. In these instances, Hilton-Baird says that writing off a debt could be worthwhile as, provided there’s VAT on the invoice, it may be possible to claim bad debt relief and at least reduce the impact on cash flow.
Ultimately, the earlier a business takes action to recover an overdue invoice, the better chance there will be of avoiding a bad debt. One thing is certain - sticking one’s head in the sand isn’t going to make the problem go away.