The Three Types Of Debtors And How To Manage Them
Minimising risk associated with unpaid debts is a constant challenge for all businesses, especially SMEs that do not have a full-time credit control department. Unpaid invoices impact not only your cashflow but also consume time and resources that could be deployed into other areas of the business. They also take a personal toll on business owners as the task of dealing with bad payers is stressful and frustrating. In this guide, we have identified the three most common types of debtors and explain how you can protect your business and your peace of mind when dealing with them.
The consistent late payer
This is probably the most frustrating type of debtor because you know you are going to get paid…eventually.
Consistent late payers can make you feel like a quasi-bank, with the customer using your credit to keep money in their business account for as long as possible. And whilst this might benefit their cashflow, your ability to meet your financial commitments will be severely diminished if you don’t address the situation.
How to protect your business
- Have a contract in place that clearly states i) the work to be completed and delivery timelines, ii) the cost of the work, iii) when payment is due, and iv) the steps taken if payment is late.
- Ask new clients to pay an upfront deposit of 25-50 per cent. This ensures that you have part of the payment and shows that the customer/client is committed to the project and, most importantly, can pay for it.
- Stop delivering your goods/services. This may result in you losing a customer, but if they are disrespecting you and your work by not paying on time you need to ask yourself whether they are the kind of client you want to have.
Can’t or won’t pay
At some point in your business-owner life, you will come across a client or customer who has no intention of paying for the work you do for them. Sometimes a client may game the system and say that the work you delivered or goods you supplied were unsatisfactory (which is why having a rock-solid contract that sets expectations is so important). Others will plea some version of “the cheque is in the post,” and a minority will simply ghost you by refusing to reply to your emails or return your calls.
With this type of client, it is crucial to act decisively and firmly (whilst being polite and professional). If they make unsubstantiated claims about the quality of your work or refuse to pay or respond to your calls and emails asking for payment then issue a Letter Before Action. This is a formal letter requesting payment of a debt owed to your business. It warns your debtor that failure to pay will result in the imminent issue of court proceedings and further enforcement action. It clearly sets out the amount to be paid and a timeframe for clearing the debt, which is usually seven days.
In most cases, a Letter Before Action will illicit payment; however, if it is ignored you will need to decide whether or not to begin legal proceedings.
How to protect your business
If possible, run a credit check on all new clients. Also, read their online reviews, they can tell you a lot about the professionalism and attitude of a company. In addition, ask for a deposit, between 25-50 per cent. If it is paid, it demonstrates that the customer/client has the will and ability to pay you for your work or products.
The insolvent debtor
A customer falling into insolvency is a challenging situation in terms of recovering debt. If you are an unsecured creditor, you are likely to be left out of pocket regardless of any proposed solutions. A recent trend concerning companies in financial difficulty is to sell the organisation via a pre-package (pre-pack) administration. The Princess of Wales’s parents sold their company Party Pieces this way in May 2023, after it faced difficulties recovering from the pandemic. Pre-pack administration occurs where negotiations for the sale of a company’s business and assets take place before administration, and the sale happens when the administrator is appointed or very soon afterwards. Although this type of solution does allow the business to continue and helps protect employees, unsecured creditors are usually caught short and only informed after the sale has taken place.
If you suspect a company that owes you money is in financial difficulty, you can issue a Winding Up Petition if the debt is greater than £10,000 and is undisputed. However, this is a risky step and should never be done without first obtaining legal advice.
How to protect your business
There are a series of warning signs that indicate a business is in financial difficulty, including:
- Overdue payment of invoices
- Avoiding calls and emails
- Asking for an extension of credit terms
- County Court judgments (CCJs) being made against the company
- Senior staff and company directors resigning
If you spot any of the above red flags and are not being paid, stop supply immediately and seek legal advice on how best to proceed to ensure you get the most money possible if the company falls into insolvency.
How Askews Legal can help
Register on our Debt-Claims Portal or email info@debt-claims.com if you have unpaid invoices to minimise the risk of getting caught up in a company administration.
To talk to us about overdue/unpaid invoices and/or retained legal support, please call us on 02476 231000 or email enquiries@askewslegal.co
Please note that this article does not constitute legal advice.
