Credit crunch - collect your debts

Another in our series about how to prevent the credit crunch eating your business. This week - managing your debts
One of the biggest problems any business has is ensuring cash flow runs smoothly, and making sure that outstanding debts don't go unpaid for too long. In 1998, the government in the UK introduced legislation which gave all businesses a legal means to collect debts, and in 2002 this was amended to help businesses recover certain expenses accrued in the collection of debts as well as interest.

However, surprisingly, many businesses fail to use this legislation to ensure that debts don't remain unpaid. However, in these times of economic uncertainty, it is ever more important to ensure that the money owing to you is in your bank account and helping your cash flow management rather than in your debtors' bank account.

Firstly, including a single sentence on every invoice sent out can make it clear to your business customers that you are fully aware of the legislation and will enforce it should they fail to pay on time.

We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms.

The interest rate you can charge is 8% over base rate so that is at the time of writing (June 2008) 13% interest on the debt calculated from the day it is incurred.

There is clear information about how to apply the legislation, claim interest and collect debts on the Pay on Time website

Secondly, ensure that your terms and conditions are understood by your business customers before entering into a relationship with them.

Thirdly, once a debt is unpaid, you need to apply interest from the day the debt becomes due. We have had one instance where despite regularly contacting the client, frequently sending them the amended invoices showing how the debt was increasing because of interest, we still ended up taking them to Small Claims Court. By the time the debt was finally paid, the interest was more than the original debt. We did not like having to resort to Small Claims but this particular client had made every excuse in the book to try to convince us that 'any day now' the cheque would be in the post. The amount owing was fairly trivial but had we had five clients doing the same, our cashflow would have been impacted, causing us our own set of problems.

And finally, you should always know how much money is owed, by you or to you. It is surprising how many small businesses are unaware of their current level of debt or credit, nor how this affects relationships with customers and suppliers. Not only should you ensure that your customers pay you on time, but you should also adopt an 'on time' payment strategy for your suppliers.

Should you be facing economic or cash flow difficulties during this time of the so-called credit crunch, then you need to assess what actions you could take to change that situation. This can include prioritising payment of bills so you pay those with the highest interest rate first eg bank loans, credit cards etc, and make sure that any delays in paying your suppliers are agreed with them, or you will weaken the relationships with your suppliers and they may amend your payment terms to make things harder in the future for you.

So, to sum up:

* Check "What is the late payment legislation"? See the Payontime website
* Implement the late payment law on all your invoices and in your terms and conditions and contracts
* Follow up on late payments with interest and reimbursement of debt collection fees, according to that allowed by law. If the worst comes to the worst, take bad debtors to the Small Claims Court - after all, it is your money!
* Pay your own bills promptly, and prioritise bills when you are having problems to keep your own interest payments at a minimum