Debt recovery is pursued on a sliding scale, as the graver the offence, the greater the severity of the action.
The steps that you decide to take to recover money owed to your business will be determined by numerous mitigating factors, such as how much money is due, how long the money has been outstanding, previous attempts to recover money and communication with the creditor, or a lack of. These factors will determine the seriousness of the action that you take, the speed at which you put this into motion and further measures that you may pursue if your strategy is unfruitful.
Debt collection is a crucial part of business operations as if there’s limited cash in your business, it could rapidly deteriorate without such fuel. Cashflow is the lifeblood of a business and if this dips, it will have a detrimental impact on the ability of your business to pay parties essential to the daily running of your business, such as staff, HMRC and suppliers.
If your business suffers from cash flow problems because of a build-up of overdue invoices and therefore, you can’t raise enough money to pay creditors, review and retune your internal and/or external debt collection tactics.
In this comprehensive guide, we delve into the crucial steps to take shield your business from bad debts. Understanding and implementing these steps can safeguard your financial health and business operations. The guide first underscores the importance of meticulous due diligence prior to any business engagement, thereby helping you assess potential suppliers' financial stability and their money management practices. Then it walks you through the step-by-step process of debt recovery, elucidating strategies from acknowledging missed payments to initiating formal legal action. By adhering to these guidelines, you can minimize your business's exposure to unmanageable debt, while fostering a financially responsible culture within your business ecosystem.
Protect against bad business debts
Ahead of the debt recovery stage, take preventative steps and perform due diligence before engaging with a supplier. This involves assessing the financial performance of a business and their relationship with money to help determine whether they are responsible with their finances. Subsequently, decide to enter into business with them based on your findings.
The debt recovery process consists of several stages that range from acknowledging a missed payment, reprimanding creditors for overdue invoices and calling in external support to help recover business debts.
Acknowledge missed payments – If a creditor commits a first-time offence and misses a payment, acknowledge this by sending a payment reminder or making a courtesy call. If the creditor is in serious financial difficulty or requires additional time to raise funds, they may use this opportunity to touch base and update you on their financial situation, should this be of concern.
Introduce formal action - Tone up your response to creditors by making a final formal request for payment and emphasising payment terms, such as interest or late payment fees. Use this opportunity to detail the next steps, such as court action, to prevent the creditor from ignoring your payment request.
If you’ve extended credit, you may decide to put this on temporary hold until the balance is cleared, or a minimum payment is made.
Launch court action - If your debt recovery efforts fail to prompt payment, you may consider issuing a Statutory Demand or a County Court Judgment (CCJ), followed by a winding up petition if the creditor fails to respond. A CCJ is a court order to enforce debt repayment, and if ignored, it can mar credit history which can be detrimental to future lending.
A CCJ is often a precursor of a winding up petition which can result in the compulsory liquidation of a business. If a WUP (Winding Up Petition) is issued to a creditor, they have a limited window during which they must carry out any of the following:
- Repay the debt
- Negotiate a formal repayment plan
- Seek an adjournment, i.e., breathing space while the creditor engages with a licensed insolvency practitioner
- Challenge the winding up petition and dispute the debt
If a winding up order is granted by the court, the process thereafter is rapid. The winding up petition will be publicly advertised and the company liquidation process will shortly commence.
Carrying out a combination of due diligence and company credit risk checks can help raise the red flag if the business is high risk. Due diligence can confirm whether the business is involved in any legal or criminal proceedings, and a company credit risk report can provide a comprehensive picture of the financial health of the business. This provides insight to help you determine whether the business is a credit risk and therefore likely to lead to issues of bad debt.