How to shout loudest when chasing SME debts
After years of successive governments stressing the contribution SMEs make to the nation’s economy and pledging to take action on issues like business rates, punishing quarterly rents and SMEs’ exposure to late payment by their suppliers, you might think local authorities would be taking it easy on those SMEs who fall behind on their own payments.
But a report from the Federation of Small Businesses highlights the stern approach taken by debt collectors acting for local authorities – even when recovering SME debts that the government have promised to provide a discount on.
Mike Cherry, national chairman of the FSB, said: “Many small firms are still reeling from the business rates revaluation that took effect in April. The £300 million hardship fund announced at the Spring Budget to help those worst affected offered a glimmer of hope, but is yet to materialise.
“With the election out of the way, there’s absolutely no excuse for local authority debt collectors chasing small businesses for incorrect, over-inflated bills without the emergency relief applied.”
The FSB found that its Small Business Index, a measure of confidence among SMEs, had fallen from +20 to +15 between the first and second quarters of 2017 – the first drop since the EU Referendum result last summer.
At that time last year, a net positive balance of 53% of SMEs said operating costs were increasing, while in the second quarter of 2017 this was up to a net 66%, with 52% of firms saying the current domestic economy represents a barrier to future growth.
Optimism – or rather, pessimism – is at its worst among consumer-facing firms, with a net negative confidence index of -4 among arts businesses and -9 in the retail sector, highlighting the particular challenges faced by those providing a service directly to consumers, rather than to other businesses.
Recovering SME debts
Notwithstanding the issues raised about the hardship fund for small business rates, and whether or not this should have been applied to the payments being demanded, local authorities do of course have a legal right to chase SMEs for payment if a debt is overdue, just as other creditors have the same right.
As such, if you are owed money by a small business, you need to stake your claim to payment in no uncertain terms, as you can bet that if they are also behind on costs like business rates, they will already be receiving red letters regarding settling those debts.
The old adage in debt recovery is that whoever shouts the loudest gets paid first – and this is often true, although many firms will prioritise paying ‘essentials’ like ground rent and business rates before they turn to servicing their supplier contracts.
What you can do, though, is to make sure that you are the supplier making the most noise, while doing so in a professional way that does not amount to harassment – as this could give the debtor an opportunity to refuse to pay.
Enlisting the help of a professional debt recovery firm is always a good starting point, as it gives added legitimacy to future communications with the debtor, and puts the process in expert hands so that only the appropriate actions are taken to recover the debt in full, as quickly as possible.
What are the options?
In theory, you are legally entitled to recover the full amount you are owed, plus a fixed fee of up to £100 depending on the amount owed, plus statutory interest for the overdue period and any reasonable debt recovery fees.
Often when the first letter from a debt recovery company lands on the debtor’s welcome mat, they will pay the original invoice amount very quickly, but ignore any fees you have asked them to pay on top, and generally it’s easiest to just accept the payment and waive the extras, although of course you are well within your rights to continue to fight for those too.
There is a legal escalation process to take debtors to small claims court and so on, but that is well documented elsewhere, so here we’ll focus on some of the other options when chasing SME debts.
Accepting partial payment and waiving the rest is one of the least desirable options, but it’s sometimes worth considering – if the debtor enters into a CVA this will probably happen anyway, so if the other creditors are not willing to consider such an arrangement, it could help you to get some of what you are owed.
Rather than ‘reward’ non-payment with a discount, you might instead want to offer a small discount on especially prompt payments, so that you are rewarding good behaviour instead of reinforcing bad practices.
You can look at instalments in one of two ways – either they prolong receiving the full amount, or they speed up receiving part of it – and whether you think they are a good or bad thing on balance depends largely on this perception.
Again, if a debtor is on the verge of insolvency and you don’t expect to receive anything at all, even a single instalment can be better than writing off the entire amount owed.
The vast majority of SMEs do not want to be in a situation where they are defaulting on payments to creditors, but large infrequent costs like business rates and rents can cause financial problems, even when their timing can be predicted well in advance.
Background credit checks can recommend a safe credit limit for each customer – but rather than putting a cap on how much you will supply them with over a certain period, you could instead bring forward their payment deadlines so they can clear what they owe sooner, and avoid reaching that limit.
If you are willing to work with customers in this way to keep both their and your cash flow more liquid, you can spot any non-payment sooner and take action against it, but in the best outcomes it gives the debtor faster turnover of goods, services and trade debts, which can help them to be more responsive to financial challenges from elsewhere.
Even in the worst scenarios, by working with the debtor on a more flexible solution, you are likely to be one of the suppliers they care most about treating fairly, which helps to put you at the top of the list when a payment is due – just don’t be seen as an easy touch by virtue of your willingness to help.
The last laugh
Along with ‘the one who shouts loudest gets paid first’, another proverb that applies in this case is ‘the one who laughs last, laughs longest’ – so don’t give up on getting back the money you are owed, as there are only a few specific circumstances that can make it impossible to recover.
If the debtor has been declared insolvent, either personally or as a business, this can put a halt to proceedings, although it’s always worth checking exactly which entity your contract was agreed with, as somebody somewhere might still be liable for the debt.
If more than six years passes without any attempt on your part to recover the debt, it typically becomes statute-barred, meaning you lose the legal right to be paid – so again, don’t give up, and consider starting action on any aged debts that are less than six years dormant.
Debtors will try all kinds of tactics to avoid paying, and it’s not always because they don’t want to – in some cases, quite ethical people are forced into such action because they are just trying to stay afloat, and only some of their creditors will ever receive even part of what they are owed.
A reputable debt recovery firm like the CPA will keep a strong focus on the end result – getting back as much of the debt as possible, in the fastest possible time – and will remain professional in the face of repeated evasion tactics by the debtor.
Ultimately, we don’t want to punish SMEs for finding themselves in a difficult financial position despite the best of intentions, but our commitment is to working diligently for our clients, their creditors, and we will not rest until you are able to walk away from the situation, if not laughing, then at least with a smile on your face.