I had some bad news recently. A company I was expecting to receive payment from had just gone into administration, on the same day as I took steps to recover payment. My usual method for seeking payment is to wait four weeks or so before issuing a reminder. If that brings no joy, I look to speak to someone personally and get them to confirm exactly when and how they are going to pay.

With this client I had heard word on the grapevine that things were not well. My fears were confirmed when I spoke to the receptionist. Even before I told her why I was calling, she requested that if I was seeking payment for a debt then I should phone another number.

The chase for recovery hit a brick wall when after about an hour of calling various numbers and getting differing responses I was put through to the soon-to-be-appointed administrator of the company, who confirmed that it was now insolvent. As an unsecured creditor I knew straight away that I was standing well back in the queue behind the Revenue, employees and the banks, so I resigned myself to the fact that the chase for my debt had realistically come to an end.

As we move further into troubled economic waters, so the issue of bad debt creeps higher up the agenda. Credit lines get stretched and customers and suppliers seek ever more flexibility in managing their cash flow. So what can businesses do to reduce the risk of being hit by bad debt?

Clarity is key

Firstly make sure your terms of trade state clearly and robustly how and when payment is to be made. Make sure the consequences of non-payment are stated, and the steps you can take to enforce payment. Many companies fall into the trap of copying their competitor’s terms of trade and not having them tailored to their company. Worse still some businesses, if they have them at all, attach their terms to their invoice which is sent out after they have carried out the work. Terms of trade need to be clear, reasonable and upfront – otherwise you won’t be able to rely on them in the event of a dispute.

Make all invoices payable on demand. While you are free to offer your customers the standard 30 days’ credit or more, that doesn’t mean you have to give this as of right. You are in effect giving your customer an interest-free loan – can your business really afford to do this?

Credit due diligence is important; if you are taking on a new customer assume the worst until proven otherwise. Carry out credit reference checks, and see if they have a history of non-payment. Obtain references from third parties. A string of County Court Judgments will tell you whether other traders have had similar problems chasing for unpaid debt. If in doubt, try and persuade the customer to provide some money up front, or offer a discount for prompt payment.

The law is on your side

In legal terms there are two things to remember. Where payments are late you have the right to charge interest on the amount of unpaid debt. The Late Payment of Commercial Debts (Interest) Act 1998 gives you the right to charge a company eight per cent above the base rate for the period between the date due for payment and the date of actual payment. If the debt you are chasing is £5,000 or less then you could seek recovery through the Small Claims Court. In many cases the process can be started online.

If things do go bad, there is some comfort. Once you have decided that the debt is no longer collectible it can be written off formally in your accounts and you should get some tax relief. Equally, VAT relief is available on a debt where you have paid the VAT on the service you have supplied, but have been unable to recover payment. If six months have gone by without payment and you have written off the debt in your accounts then you should be able to recover the VAT.

Debt recovery should be done without hesitation or fear. It’s a question of managing credit and there is no reason why it should not be carried out dispassionately. It may be wishful thinking but let’s hope our debtors will hear, and act on, the words of Benjamin Franklin who said it was better to ‘go to bed without dinner than to rise in debt’.

For more advice on collecting debts, click here.