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David Gordon of DG Law on how to reduce your risk of crippling business debt It was Benjamin Franklin who said better to “go to bed without dinner than to rise in debt”. Unfortunately for too many these words have been ignored and bad debts are on the increase. The Credit Crunch brings into sharp focus the effect of lenders tightening their credit lines and putting exponential pressure on the credit a businesses gives to its clients and customers . Here are some tips to avoid debts going bad.
Make sure your terms of trade are clear and robust – they should state how and when payment is made and the consequences of non payment. Make sure they are clear, reasonable and upfront – otherwise there can be problems in seeking to rely on them come a dispute.
Make invoices payable on demand. While you may choose to wait 30 days before chasing for payment don’t enshrine it in contract. If your invoices aren’t clear when payment is due you may have difficulty in recovering statutory interest before you have made your first demand.
Think about taking a personal guarantee from a director. While your bargaining position may not allow this, it doesn’t stop you asking the question. Can you ask for some money up front or offer a discount for prompt payment? This might limit your exposure.
And if you want to go to law send out a “Letter Before Action”. This gives your debtor a formal notice to pay up or suffer the consequences. It should set out when you expect payment eg 7 days and the consequences of non payment eg legal action. If your debtor still fails to pay, then if the amount is £5000.00 or less you could go through the Small Claims Court. Costs here are quite low. Alternatively if there is no dispute about the goods or service you could consider issuing a “statutory demand” This threatens the debtor with insolvency. But this procedure should not be used lightly as the courts will take a dim view if your debtor raises a credible defence to your claim.
If you have decided that the debt is not collectible this can be written off in your accounts and you may get tax relief. VAT relief should be available on a debt where you have been unable to recover payment for 6 months or more. Clearly, your accountant can advise you on this.
The downside of having over 10 years of economic growth is that we have probably all become a little too lax about credit risk - failing to question the ability of third parties to pay. Taking some steps upfront and following the procedures set out above will, I hope, help you minimise the risks to your business. Without question these are difficult times, so let’s hope we can all get up each day having had all our meals and with a little less bad debt to contend with.
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