CREDIT MANAGEMENT SKILLS

PPC training programme Facilitated by Lenox Mhlanga

Associate Consultant

Stratways Management Consulting (Pvt) Ltd

OBJECTIVE

PPC would like to develop credit management skillsin specified areas of need as per the organisations training needs assessment

PROGRAMME OUTLINE
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Improve your accounts receivables, billing and credit collections processes Establish effective credit and collection policies Understand the legal procedures involved in debt recovery Analyse the modes of execution and/or recovery

DETAILED OUTLINE
The Streamlined approach to credit management 1. Definition 2. Process 3. Invoicing 4. Results

OUTLINE CONTINUED
An Entrepreneurial Approach to Credit Control 1. Critical Information in debt prevention 2. Action Plans to overcome debts 3. Strategies to improve relationship between sales and credit control 4. Effective debt collection

OUTLINE CONTINUED
Understanding Credit Culture to deliver an efficient Credit process 1. Definition of Debt 2. Credit and Legal Requirements 3. Options for Litigation

OUTLINE CONTINUED
Workshop discussion on the following: 1. Garnishee orders 2. Attachment 3. Judgement debtor summons 4. Fraud prevention 5. Payment delay tactics 6. Implementing good negotiation tactics

CREDIT MANAGEMENT SKILLS

Introduction Credit management is the process for controlling and collecting payments from your customers. A good credit management system will help you reduce the amount of capital tied up with debtors (people who owe you money) and minimise your exposure to bad debts.

INTRODUCTION
Debt recovery is an important function in companies. Very few companies can function properly on cash business or without obtaining credit from financial institutions.

INTRODUCTION

Companies that do not give or take credits are usually very small in size and have limitation in expanding. Although offering credit terms to customers is tantamount to expansion and acquiring big customers, there is always an element of risk involved. Therefore, many companies implement strict credit policies to minimize their credit loss arises from bad debts

A STREAMLINED APPROACH
What is Credit Management? Credit management is a term used to identify accounting functions usually conducted under the umbrella of Accounts Receivables. Essentially, this collection of processes involves: 1. Qualifying the extension of credit to a customer, 2. Monitors the reception and logging of payments on outstanding invoices, 3. The initiation of collection procedures, and 4. The resolution of disputes or queries regarding charges on a customer invoice.

THE PROCESS
The process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is particularly important if the company chooses to extend some type of credit line or revolving credit to certain customers.
1. 2. 3.

Proper credit management calls for an evaluation process that involves Setting specific criteria that a customer must meet before receiving this type of credit arrangement. Determining the total credit line that will be extended to a given customer.

FACTORS TO BE CONSIDERED
Factors used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit. 1. Gathering data on the potential customers current financial condition, including the current credit score. 2. The current ratio between income and outstanding financial obligations will also be taken into consideration. 3. Competent credit management seeks to protect the vendor from possible losses, and also 4. To protect the customer from creating more debt obligations that cannot be settled in a timely manner.

INVOICING
After establishing the credit limit for a customer, credit management focuses on providing the client with accurate and timely statements or invoices. The Invoice Should be delivered to the customer in a reasonable amount of time before the due date, Providing the customer with a reasonable period to comply with the purchase terms. The period between delivery of the invoice and the due date should also allow enough time for the customer to review the invoice and contact the vendor if there are any questions or concerns about a line item on the invoice. This should allow all parties concerned time to review the question and come to some type of resolution.

THE RESULT
The result of an efficient process of credit management is that everyone involved benefits from the effort. 1. The vendor has a reasonable amount of assurance that invoices issued to a client will be paid within terms, 2. Or that regular minimum payment will be received on credit account balances. 3. Customers have the opportunity to build a strong rapport with the vendor and 4. Are able to create a solid credit reference.

2. AN ENTREPRENEURIAL APPROACH
Knowing your customer Unless you know exactly who youre trading with, you wont be able to check if they are good for the amount of credit you need to grant, you wont be able to commence legal action effectively if it becomes necessary.

KNOWING YOUR CUSTOMER

Can you answer yes to all these questions? Do you know the exact name and trading style of the business? The people or company that own the business, and are liable for any debts, may not be the same as the name under which the business trades. Types of business include, amongst others, limited companies, partnerships and sole proprietors.

KNOWING YOUR CUSTOMER

Question you should ask It its not a limited company do you know the name(s) and personal address(es) of the proprietor or partners? Have you seen headed paper or documentation that verifies this information? Have you used a credit reference agency to check their details and credit status?

KNOWING YOUR CUSTOMER

Does the information support the amount of credit theyll need? There are many sources of information, the most common and readily available being credit agency reports and references. Have you talked to other suppliers of the business to obtain references?

KNOWING YOUR CUSTOMER

Do the details on the order match those you were given earlier? If they were previously dealing with your competitor, are you happy about their reasons for coming to you?

KNOWING YOUR CUSTOMER: TIPS

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Check out the exact name and legal status of the business youre supplying. If its a sole trader or partnership, the proprietor or partners are personally liable so make sure you have their full details. Businesses can disappear much more quickly and easily than individuals! Dont be afraid to push for all the information you need if you cant get it now, it will be far more difficult later.

2.

KNOWING YOU CUSTOMER: TIPS

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Watch out for friendly references that the potential customer gives you. Referees that you choose are far more effective. Invest in credit reference information it could save you a bad debt. Set some rules that you (and all your employees) always follow and dont be tempted to break them, even if youre put under pressure to supply urgently

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PAYMENT TERMS

If payment fails to arrive for goods or services you have provided, your cashflow can be under real pressure. Cashflow keeps business in business and if you think you are being paid on one date and your customer has a different date in mind you could be in trouble! Making assumptions is dangerous and formally agreeing payment terms in advance is vital.

PAYMENTS TERMS
Questions to ask yourself Do you discuss and agree payment terms with your customers (and with your suppliers) before you accept (or place) an order?

Do you confirm the agreed payment terms in writing before you accept (or place) an order?
Do you negotiate payment terms with your suppliers that allow you longer to pay than the terms on which you are paid by your customers?

PAYMENTS

If the answer to the question above is no, do you have finance or a finance facility in place to bridge the gap between the time you pay and the time you get paid?

Do you produce, and then regularly review, a cashflow forecast to ensure that everything is under control and there is nothing waiting to surprise you?
Do you have standard payment terms in place and a policy within your organisation saying that they cannot be changed unless properly authorised?

PAYMENTS

Is the payment due date clearly shown on all invoices? Do you have a strategy in place for dealing with requests from customers who suddenly and unilaterally demand a longer time in which to pay?

Do you include your right to make late payment and interest charges on your contracts and invoices?

PAYMENTS: TIPS
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Set out and agree payment terms in advance and in writing. Its better to know what to expect than to leave things to chance and wonder why the money hasnt arrived later. Watch out for any wording in documents from your customer that changes the agreed payment terms. If you accept their order, you might also be accepting their changed payment terms. If their documents contain terms that are different to yours and you fail to challenge them, their terms will take precedence.

PAYMENTS: TIPS
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Whenever you write about payment terms, and on your invoices, include the words: We will exercise our statutory right to claim interest (e.g. at 8% over the bank rate) and compensation for debt recovery costs if we are not paid according to our agreed credit terms. Even if you dont intend to do so, it can be a useful deterrent against late payment.

PAYMENTS: TIPS
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Raising a further invoice for interest and late payment charges is an excellent way of gaining your customers attention and raising the profile of your outstanding invoices. If your customer unilaterally tells you they are going to take longer to pay in future, you will have to decide how important their orders are to your business. If theyre claiming the extended payment terms for invoices already raised, you should demand payment under the previously agreed terms for goods or services previously supplied.

INVOICING

If you dont raise an invoice, you wont get paid. Invoicing should not be seen as a backoffice administrative nuisance. Rather, it is a vital first-step in achieving healthy cashflow.

INVOICING
Can you answer yes to all these questions? Do you raise an invoice immediately after you have supplied the goods or service?

Do you make sure that everything the customer requires appears on the invoice? Do you have an effective accounting system and have you considered using dedicated accounting software?

INVOICING

Do you have a process for investigating and resolving disputed invoices immediately after the query is raised?

Do you log the details of disputes so you can fix any avoidable root causes? Do you keep documentation relating to disputes as evidence in case the problem escalates?

INVOICING

Do you keep a record of the customers that dispute invoices so you can spot any who do so regularly as a way of avoiding prompt payment? Do you ensure your sales invoices are fully compliant with Vat requirements? Do you clearly indicate any reference the payer must quote so you can identify the payment?

TIPS FOR INVOICING

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The sooner you ask, the sooner you can get paid; send by first class post or, better still, by email. Get invoices right first time; raising credit notes and reissuing invoices takes up resources and time better spent elsewhere. It also changes the payment due date.

TIPS FOR INVOICING

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Ask customers what they need on the invoice in order to approve it simply and quickly. Include at least the following:
Your

full name and address Your VAT registration number Invoice date Correct customer name Correct customer address Delivery address (if different)

TIPS FOR INVOICING

Delivery date and method Customer Purchase Order number A clear description of the goods or service supplied Accurate quantities, prices, discounts and total amount due Payment terms and due date How payment should be made with bank details (including sort-code and account number from bank statement) Invoice number or other reference to be quoted by payer Payment terms and due date bank statement and the reference to be quoted if payment is by direct credit.

TIPS FOR INVOICING

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Include the words: We will exercise our statutory right to claim interest (at 8% over the Bank rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms on every invoice, and print your terms and conditions on the back. Have a system for resolving disputed invoices promptly, especially if a customer is using a small query to withhold.

CHASING PAYMENT

When you get paid, the sale is complete. When a customer doesnt pay, theyre hanging on to money that is rightfully yours and you should ask for it. You should have a routine system for following up non-payment that includes letter, email, and telephone, but be prepared to act more quickly if the amount is large or you are concerned about the customer.

CHASING PAYMENT
Can you answer yes to all of these questions? Did you agree the payment terms with the customer before you accepted their order? Are you sure the invoice is accurate and no dispute has been raised? Has the payment due date passed? Has the customer confirmed receipt of the invoice? Do you have proof of delivery for any goods delivered? Does the invoice say how and where payment should be made?

TIPS FOR CHASING PAYMENT

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If the invoice is large, call the customer before the payment due date to make sure it has been received and there is no query; this is good customer service. Make immediate contact when payment has not arrived, be assertive about what you expect and when you expect it, and make the consequences of non-payment clear. Follow up promises to make sure theyre met.

TIPS FOR CHASING PAYMENT

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If a customer persistently pays you late or makes excuses, check them out and consider whether youre prepared to continue supplying on credit terms. It may be better to lose an order, or even the customer, than supply goods, not get paid and suffer a bad debt (when that happens you lose the goods and the money youre due). Be polite, professional and persistent; do what you say youre going to do when you said you were going to do it. Try to get customers to pay by electronic transfer or Direct Debit to avoid waiting for the cheque to arrive.

3. UNDERSTANDING CREDIT CULTURE TO DELIVER A MORE EFFICIENT CREDIT PROCESS

POLICIES AND PROCEDURES

A good Credit Policy covers all aspect of the business transactions ranging from review of potential customers creditability to ascertaining the amount and duration of credit terms. No matter how good and solid is a credit policy there is no way that it can eliminate credit loss totally. However, a good and effective credit policy could help to determine calculated loss and minimize its impact to the business.

CUSTOMERS CREDITWORTHINESS
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In order to make a good judgement on the customers credit worthiness, it is important to take note of the following points: The company must have a good track record of sales achievement. The sales and profit must be on a gradual increase year by year. A gradual declining sales and profit is a bad indicator of the companys future performance. Also look out for sudden dip or surge in sales and profit without justifiable reasons.

CUSTOMERS CREDITWORTHINESS
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A good cash flow management is important to ensure the companys on-going concern. Ensure that the company practices that. The company should have a positive Net Equity position. (Total Assets less Total Liabilities) A negative position means that the company is in serious financial status or insolvent. The company practices good debt recovery procedures and a credit policy.

CREDIT MANAGEMENT PROCEDURES

A good credit management procedure is pertinent to ensure an effective credit policy. The procedure forms the basis on how to determine the potential customers credit worthiness and what amount of credit and terms to give. It also covers how the company would monitors and manages its trade debtors. The following are some important actions to take and consider when managing your trade debtors:

CREDIT MANAGEMENT PROCEDURES

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Perform credit evaluation if new and exiting customers regularly. Assign credit limit to each of your customers. Avoid giving unlimited credits. Set clear payment terms with your customers. Ensure that they are aware of the credit terms and practiced within them. Ensure that your invoices and monthly statements are accurate and sent to your customers promptly.

CREDIT MANAGEMENT PROCESS

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Ensure you have the supporting documents for all unpaid amounts readily available. Perform periodical follow up on outstanding invoices or balances. Keep records of all telephone conversations and corresponding letters to and from customers. Do be afraid to consider legal actions if you feel payment is not forthcoming. Get customers to provide written acknowledgement on big invoices or big amount owing.

CREDIT MANAGEMENT PROCESS

There is no use making a lot of sales if you cannot collect the money. Giving too much credit and too long credit term can hurt your cashflow. It is better to reject a big business deals if there is a potential credit risk involved. A company cannot survive without strong cashflow. Therefore a good and effective debt recovery and credit management procedures would stabilized the companys cashflow and ensure on-going business concern.

CREDIT MANAGEMENT TIPS

Good credit management is vital to your cash flow. It is possible to be profitable on paper and but lack the cash to continue operating your business. It is best to minimise the likelihood of bad debts through good credit management practices.

TERMS AND CONDITIONS

The following suggestions will assist you in preparing your own policies and procedures for credit management: 1. Clearly state in writing your terms and conditions of trade and your credit policy in writing. 2. Draft terms and conditions that suit your business.

TERMS AND CONDITIONS

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It is strongly advised you seek legal advice before finalising the document to ensure it has internal consistency and covers all the key issues. It's also important to ensure the document does not contain any illegal terms and can be relied on in the event that court action is necessary to recover a debt. Include your terms on all quotes, estimates, contracts, agreements, purchase orders,and related documentation.

TERMS AND CONDITIONS

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Clearly specify what will be supplied, when the work will be done, and when and how payment is to be made. Obtain a written acceptance of the agreement along with written approval of any variations to the original agreement.

TERMS AND CONDITIONS

Some terms and conditions that you could consider: Penalties for late payment you must specify the exact fees and rate of interest; Retention of title' clause where the seller retains title to the goods until payment is made; Your policy on returns and refunds;

TERMS AND CONDITIONS

Continued Your policy on refund of deposits; Incentives for early payment; and Whether a fee is charged for payment by credit card. (The amount in dollars or the percentage to be charged must be disclosed.)

INVOICE PROMPTLY

Include accurate details on your invoice for the goods or services supplied, the amount due along with the date and preferred payment method. Always try to resolve invoice queries or disputes quickly.

MONITOR YOUR DEBTORS

Maintain your debtors' records to identify any due or overdue debts. Develop a good records management system and keep records up to date so you can quickly identify who owes you money and how much is owed.

MONITOR YOUR DEBTORS

Take a proactive approach to credit management by contacting clients a few days before the due date to remind them a payment is due and ask if they foresee any problems with meeting their payment. Implement your debt collection practices the minute a debt becomes overdue and ensure clients do not exceed their credit limits.

CREDIT APPLICATION PROCESS

It is sometimes possible to increase sales by granting credit to selected clients who may choose to do business with you because of the convenience offered by a credit account. If you choose to provide this option be sure to develop a sound credit application process which includes a thorough check of client credit ratings before granting approval.

CREDIT APPLICATION PROCESS

Allowing some clients to purchase on credit is like offering them an interest free loan, and you are not obliged to provide credit to risky clients. Allowing clients to defer payments increases the risk of bad debts occurring and draining your cash flow, so it's vital that you identify good customers and screen businesses with a poor credit history to minimise bad debts and avoid cash flow problems.

CREDIT APPLICATION FORM

Develop a credit application form and have the draft checked by your lawyer. The credit application and approval process could include, but is not limited to the following steps: The completion of a credit application form which requests full business and personal contact details, trading name, credit guarantors, referees, company registration number and the number of years in business; Asking for details of suppliers who can be contacted as referees and then checking the client's payment habits with the referees;

CREDIT APPLICATION FORM

Requesting bank references; Asking the client to sign a directors' guarantee which makes the directors of a company personally liable for any debts incurred with your business; Checking the client's business registration with the Registrar of Companies;

CREDIT APPLICATION FORM

Obtaining a credit report to determine whether the client is credit worthy. A range of credit reports can be obtained from commercial information brokers. Discuss the reports available and the costs involved with individual broker firms; and Periodically evaluating the credit rating of your existing credit clients

ALTERNATIVES TO PROVIDING CREDIT

You may find it necessary to reject credit applications in some cases. Rather than risk losing the client entirely, you might suggest alternative payment methods while your client establishes a trading history with you. Review the client's situation after a specified volume of trade, number of orders, or period of time.

ALTERNATIVES TO PROVIDING CREDIT

The alternative methods may include: Requesting cash on delivery ( COD ) for new clients until a trading history is established; Collecting a deposit before making a supply to cover costs of materials and overheads, and as an indication of their ability and intention to pay; Collecting progress payments that are linked to achieving major milestones. Progress payments are common in the construction and building industry; and lay-by

4. UNDERSTANDING LEGAL PROCEDURES AND DOCUMENTATION

DEBT RECOVERY

You may still incur bad debts even with sound credit management policies and procedures. There are a several methods with escalating degrees of severity that you can use to recover these bad debts. It is advisable to use a measured approach and select the most appropriate method to recover the debt while maintaining the relationship with your client.

DEFINITION OF DEBT OWING

A debt exists when a person or organisation (a debtor) owes you money for any reason, for example following your supply to them of goods or services You might use a letter of demand to advise the debtor of the amount outstanding and threaten court action to recover the debt if it is not paid within a certain time.

DEFINITION OF DEBT OWING

Essentially, an unpaid invoice is a breach of contract. Disputes arise when parties to a contract don't do what they agreed - in this case - paying for products or services supplied. Generally, your debt collection options include: 1. Personal communication and consultation with your client 2. A written request to settle the debt (letter of demand) 3. A debt collection agency 4. Legal action.

COMMUNICATION

Chase overdue invoices immediately. Contact your client by phone or email the day after the invoice is due. This lets your client know that you keep close track of your accounts receivable. Sometimes invoices get lost or overlooked, so maintain positive relationships with your client and be polite and friendly.

COMMUNICATION

Ask if the client is experiencing a short-term problem or if there's a valid reason for not making the payment. Decide how valuable the client is to your business. You may be willing to temporarily extend their credit terms, or you might cancel the client's credit agreement if late payments become a persistent problem.

COMMUNICATION
If communication and consultation with the client does not result in payment of the debt, you may decide to send a letter of demand. This gives your client the opportunity to pay the debt without spending the time and money associated with legal proceedings. Keep a copy of the letter of demand you send the client as it may be required as evidence that you tried to recover the debt if you proceed with legal action. Either you or your lawyer can draft a letter of demand.

LETTER OF DEMAND

A letter of demand is sent to a person or organisation who owes you money (a debtor) following your supply to them of goods or services The letter advises the debtor of the amount outstanding and threatens court action to recover the debt if it is not paid within a certain time. A sample is provided below which can be used as a guide.

WHY SEND A LETTER OF DEMAND?

A letter of demand serves two purposes: First, it warns the debtor of your intention to commence legal proceedings unless payment is made and gives the debtor one more opportunity to pay. Secondly, the letter is a document which may be tendered in evidence during court proceedings as written proof of your claim of the debt owed and your attempt to settle the matter.

LETTER OF DEMAND
Copies of any relevant documents such as contracts, letters of agreement, invoices, etc, should be listed and attached to the letter of demand to assist the debtor to identify the transaction and their liability to pay. It is advisable to send the letter of demand by registered post or fax to confirm receipt and don't forget to retain a copy for your records. Only one letter should be sent and you should be prepared to act on your threat to initiate legal action otherwise the debtor may simply call your bluff.

LETTER OF DEMAND
When drafting a letter of demand you should not: harass the debtor they have the right to complain about this behaviour to particular government agencies and the police; and send a letter which is designed to look like a court document. These debt collection practices are illegal.

LETTER OF DEMAND
The letter of demand should: State details of the debt ( dates, agreements, amounts due, and days overdue) Include copies of applicable quotes or invoices Request that payment be made by a certain date Warn that debt recovery options will be pursued if payment is not received by the nominated date.

DEBT RECOVERY OPTIONS

In looking at your debt recovery options consider: 1. the real chances of recovery 2. the time taken away from your business in pursuing the debt 3. debt collector agency costs 4. the legal and court costs 5. whether costs will be recoverable from the debtor 6. the need to obtain legal advice.

DEBT RECOVERY
What should I do to pursue a debt? Debt collection is a legitimate and necessary business activity where creditors and collectors are able to take reasonable steps to secure payment from consumers or businesses that are legally bound to pay or to repay money they owe. It is important that any organisation involved in recovering debt is aware of their legal obligations.

DEBT RECOVERY
You should treat debtors and third parties fairly and with respect and courtesy. You should never harass or coerce them, treat them unconscionably or mislead them as to the nature of their debt, their legal obligations or any possible outcomes if the debt is not paid. You should also not pursue a person for a debt unless you have reasonable grounds for believing the person is liable for the debt.

DEBT RECOVERY
Contacting a debtor Communications with the debtor must always be for a reasonable purpose, and should only occur to the extent necessary. It may be necessary and reasonable for you to contact a debtor to: give information about the debtors account convey a demand for payment

DEBT RECOVERY
accurately explain the consequences of nonpayment, including any legal remedies available to the collector/creditor, and any service restrictions. make arrangements for repayment of a debt put a settlement proposal or alternative payment arrangement to the debtor review existing arrangements after an agreed period

DEBT RECOVERY
ascertain why earlier attempts to contact the debtor have not been responded to within a reasonable period, ascertain why an agreed repayment arrangement has not been complied with, investigate whether the debtor has changed their residential location without informing you, when there are grounds for believing this has occurred sight, inspect or recover a security interest or for other similar purposes.

DEBT RECOVERY
You may also contact a debtor at the debtors request. However, it is not reasonable or acceptable to contact a debtor to: frighten or intimidate the debtor demoralise, or exhaust the debtor embarrass the debtor in front of other people or for other similar purposes.

DEBT COLLECTION
Hiring a debt collector A debt collector recovers payment on behalf of another person for outstanding debts that individuals or businesses are legally obliged to pay. Demands for payment can be made in writing, verbally over the telephone, or in person. Debt collection agencies charge a fee or percentage of the total amount collected.

CONTRACTUAL OBLIGATIONS
Commercial contracts are the basis of doing business. Whether they are purchase orders, supply contracts, exclusive agency agreements, partnership agreements, franchise agreements, or leases, businesses enter into contracts with others on a daily basis. Disputes arise when parties to a contract don't do what they agreed. It is preferable to resolve the dispute without court action wherever possible.

CONTRACTS
First, read the contract and other associated documents to clarify the rights and obligations of each party about the issue in question. In many cases, a well-written contract will set out what both parties have agreed and the action required will often be obvious. Also, check your contract for a clause that outlines a process for dealing with disputes between the parties. If the contract or other associated documents do not clarify the issue, obtain professional advice

CONTRACTS
There are three options available to resolve your contract dispute: 1. Informal negotiation: The cheapest and easiest thing to do is attempting to resolve the dispute through discussion. Try to resolve the problem through talking and informal negotiation with the other party. Often the parties to the contract can negotiate a resolution that is satisfactory to both without the need for formal mediation. Remember to confirm any verbal agreements in writing.

CONTRACTS
2.

Mediation and arbitration: mediation or arbitration is another option to resolve the dispute if informal negotiation fails. It is a way of reaching an agreement that is usually cheaper and quicker than using the courts. An independent mediator will assist to negotiate an outcome which meets the interests of both parties. Mediation is not a binding legal process but the agreement can be enforced if necessary.

MEDIATION AND ARBRITRATION

Arbitration is a more involved process similar to court proceedings but much less formal. An arbitrator is an independent third party that will decide the dispute between the parties. The arbitrator considers the evidence of the case presented by both parties and then makes a decision that can be legally enforced. There are numerous private mediators with skills and experience in this area for example the Commercial Arbitration Centre

CONTRACTS
The Courts: you may find it necessary to take the dispute further if other forms of resolution have not been successful. Before you seek a resolution in the courts, carefully consider whether the issue is worth the damage it may cause to the relationship with the other party. Further, this option can be expensive and time consuming. However, if you have a good case and the dispute cannot otherwise be resolved this could be your best option.
3.

LEGAL PROCEEDINGS
Sometimes, you just cant get paid. Youve done all the right things and the money has still not arrived. The longer the debt remains unpaid, the more likely it is to turn into a bad debt and bad debts damage your business. Legal action is always an option but there are others you should also consider. Be prepared to follow through with any warning about legal action in your letter of demand. Some legal proceedings may become complex and expensive.

LEGAL PROCEEDINGS
Questions you need to ask before taking legal action Are your invoice(s) raised in exactly the right name? or your invoice(s) have all the information required by the customer? Has the customer confirmed receipt of the invoice(s)? Are you sure there are no queries? Do you have proof of delivery if the debt relates to goods supplied, or a signed order for services?

LEGAL PROCEEDINGS
Do you believe the customer has the funds to pay you? Has the customer promised to pay OR are they refusing to talk to you at all? Is the debt straightforward? Do you have a record of all your collection activity to date?

LEGAL PROCEEDINGS
If the answer to all these questions is yes, its probably time to move to the next stage and consider: Taking legal action either yourself or using a solicitor commencing legal action is relatively easy but takes time and effort. Using a lawyer will save you effort but cost you more if the debt and costs arent recovered.

LEGAL PROCEEDINGS

Using a debt collection agency to act for you. They will often work on a no recovery no fee basis, collecting debts is their specialist area, and most will escalate action through their own legal partners if it becomes necessary. You should be aware that the percentage commission can be substantial if they succeed, especially if the debt is large.

LEGAL PROCEEDINGS

Issuing a Statutory Demand that you can follow up to 21 days later with a bankruptcy (individual) or winding up (company) petition. You need to bear in mind that, if the customer fails to pay, their insolvency may follow and you are then even less likely to recover the debt.

LEGAL PROCEEDINGS
Five top tips 1. Make sure the invoice details are accurate before you consider taking further action. 2. Always write and advise your customer that you will be exercising your statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation and that you will be taking further action this might be enough to prompt them to pay.

LEGAL PROCEEDINGS
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If you cant get paid for the outstanding debt, dont let it grow. Stop supplying any further goods or services. If your product or service is important to your customer, it might be just the lever you need to get payment. Always consider the commercial reality if the customer is insolvent or has no available funds, further action is unlikely to help, and consider the costs of any action against the size of the debt.

LEGAL PROCEEDINGS
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Check out any solicitor or agency before you instruct them; make sure they belong to their appropriate trade association or professional body and check that their background and expertise matches your needs.

WHEN YOUR CUSTOMER GOES BUST

Inevitably, businesses fail and when one of your customers goes bust it hurts. There is little you can do except wait to hear the outcome. The general outcome is that the debtors assets are divided amongst its creditors and the insolvent debtor is released from the burden of its debts. Once most formal insolvency processes are underway, you cannot start or continue any action to recover your debt. It helps to understand the main types of insolvency

TYPES OF INSOLVENCY
Bankruptcy Bankruptcy can only apply to individuals (including sole traders and individual members of a partnership). Bankruptcy petitions may be presented to the court by the individual, by creditors, or by the supervisor of an individual voluntary arrangement. A bankruptcy order is made by the court.

TYPES OF INSOLVENCY
Individual Voluntary Arrangement An individual comes to an arrangement with creditors to pay his/her debts in full or in part over time as an alternative to bankruptcy. The arrangement is set up by a licensed Insolvency Practitioner who will put it to a meeting of creditors. If the proposal is accepted at the meeting, the agreement reached with the creditors will be legally binding. An Interim Order is sometimes issued by a court and will immediately protect the debtor from any legal action by creditors.

TYPES OF INSOLVENCY
Company Voluntary Arrangement A company comes to an arrangement with its creditors to pay the debts in full or in part over time. A CVA begins with the company (or its adviser) drafting a formal proposal at a Creditors Meeting to pay part or all of the debts. If the proposal is accepted by the creditors, the arrangement will become legally binding and the directors will retain control of the company.

TYPES OF INSOLVENCY
Compulsory Liquidation Compulsory liquidation is the winding up of a company or a partnership by a court order (a winding up order). A petition is normally presented to the court by a creditor stating that he or she is owed a sum of money by the company and that the company cannot pay.

COMPULSORY LIQUIDATION
The Official Receiver becomes liquidator when the order is made but an Insolvency Practitioner will be appointed to take over if the company has significant assets. The liquidators role is to realise the companys assets, pay all the fees and charges arising from the liquidation, and pay the creditors as far as funds allow in a strict order of priority.

TYPES OF INSOLVENCY
Creditors Voluntary Liquidation In a creditors voluntary liquidation the shareholders pass a resolution to wind the company up without the need for a court order. A Creditors Meeting is held to nominate the appointment of a liquidator and consider a statement of affairs. Creditors can appoint a committee to work with the liquidator, whose role is to realise the companys assets, pay all the fees and charges arising from the liquidation, and pay the creditors as far as funds allow in a strict order of priority.

TYPES OF INSOLVENCY
Administration Administration applies to limited companies and partnerships and is intended to get the company out of trouble and trading again if possible. Administrators can be appointed to a company that is unable, or is likely to become unable, to pay its debts. They can be appointed by the courts (on application from a creditor, directors or partners), the holder of a qualifying floating charge over the assets of the business, or the company or its directors.

ADMINISTRATION
An administrators primary goal is to rescue the company as a going concern. If this isnt possible, the administrator will try to get a better result for the creditors than would be possible if the company was wound up. If neither of these is possible, the administrator will sell the companys property to make at least a partial payment to one or more secured or preferential creditors, such as employees or the bank.

INSOLVENCY
Five Top Tips You should be contacted automatically by the Official Receiver or Insolvency Practitioner if they know that you are a creditor. If you believe an individual may be subject to insolvency proceedings and you have not heard, find out. If you believe a company may be subject to insolvency proceedings and you have not heard, check with the Registrar of Companies. If in doubt, contact the Official Receiver or Insolvency Practitioner to make sure they have details of your debt. Also, contact them if you have any information about the assets or the conduct of an individual or