Cash flow is essential to the successful operation of any business, no matter its size. For that reason, it’s vital to keep track of your invoices and have measures in place for when a payment isn’t made.
Smaller businesses, particularly those with narrow margins, longer credit terms, and large order quantities, are often the worst affected by late payments. According to the Federation of Small Business, around 8% of SMEs are facing closure due to payment problems. Fortunately, legislation exists to deter late payers and compensate businesses that are negatively impacted.
In this article, we explore the legal action you can take to improve your payment practices and protect cash flow.
Initial steps to resolving a late payment
Contacting the customer
Businesses normally have payment terms of 28 days. When payment has not been received within that timescale or by an agreed date, you should contact the customer directly to request payment. This can also be undertaken by the business’s credit controller or the employee dealing with the customer.
It’s best to reach out to the customer in written form, whether that's an email or letter, to ensure you have a record of communication. If an unpaid invoice cannot be resolved at this early stage, there are various options available, including charging late payment fees, seeking mediation, and making a court claim.
When faced with a late payment, interest can be added to the bill once the agreed deadline has passed. By charging additional fees, you may prompt a quick response and prevent further escalation.
Under the Late Payment of Commercial Debts (Interest) Act 1998, you can claim interest and other business costs incurred due to a late invoice payment. You can charge interest at 8% plus the Bank of England base rate unless your terms and conditions specify another rate of interest.
It’s always prudent to perform background checks on the person or company that owes you money before deciding on the next step. If the person doesn’t have any money or assets, or is on the brink of closure, it may not be advisable to chase payment. In such cases, it’s unlikely that you’ll successfully recover the debt, but you could spend a significant amount of time and money on chasing the customer. This is also true if a company has a lot of bad debts to its name.
You can check whether a company is still trading and whether it’s subject to any insolvency notices by searching company profiles on The Gazette. You can also check for any judgments registered against an individual or a company via Trusts Online by paying a nominal fee.
Seeking legal advice
Once a business owner has undertaken background checks, the next step is to obtain legal advice from a solicitor with experience in debt recovery. Most solicitors will offer an initial appointment for a small fee to discuss the problem and decide if it’s worth pursuing. You can find law firms that cater specifically to small and medium-sized companies. For example, LawBite offers a cost-effective business debt recovery service designed for SMEs.
Taking legal action to recover the debt
Sending a late payment letter
The first step in debt recovery action is for your solicitor to write a formal letter requesting payment for the overdue invoice. This letter should also state a reasonable notice period of any pending court action, explaining that the business owner will issue a claim in court for the money after this time.
A solicitor's letter may be enough to resolve the issue, as many companies would prefer to avoid going to court.
Your email correspondence and your solicitors’ letters will be required as evidence if a court claim is made at a later date. As court claims are seen as a last resort, the court will look favourably on your case if you can show that you attempted to settle the matter and gave the customer adequate notice before taking court action.
The solicitor’s letter will provide both parties with an opportunity to reach an agreement without going to court. This process is called business mediation. It can either be a formal mediation, where an independent mediator is instructed to hear and decide the case, or an informal mediation. With the latter, you’ll meet with the customer to settle your dispute.
Informal mediation is a good way to try and illicit payment from the customer, providing both sides with the opportunity to air their views and come to a satisfactory conclusion.
Making a claim
You can submit a money claim in court if a customer refuses to pay or engage in mediation. The specific court in which the claim is heard depends on the amount owed. For claims of up to £10,000, there's a dedicated small claims court. If the debt is over £10,000, this will usually be handled by the 'fast track' or 'multi-track' routes.
For the small claims court, a business owner who brings a claim and instructs solicitors to assist will not recover their legal costs, but they can claim their court fees and small expenses like travel costs. Legal fees are payable by the losing party in the fast and multi-track systems.
A judge will make a final decision which is binding on both parties. If the business owner wins, the court will order the customer to make payment within a certain timeframe. This is usually 28 days from the date of the judgment.
There may be some customers who still refuse to pay even though the court has awarded a judgment against them. You can instruct bailiffs to remove goods to the value of the judgement obtained from the customer's property. Normally, the bailiffs will add their costs to the judgment amount, which is to be paid by the customer.
About the author
Andrew Farrguia is a dispute resolution consultant solicitor at LawBite with experience in commercial and property-based mediations. LawBite specializes in assisting individuals and SMEs with their commercial and dispute resolution requirements.