Big or Small, Debt Affects us All-How to Prevent Losses to your Business

Recently in the news we have seen that the Telegraph Media Group has run into some trouble with meeting its’ financial obligations. We spoke with our Commercial Litigation Partner, Stuart Love, for his expert advice on how to prevent your business from facing the same financial difficulties when taking on new clients.

Receivers being appointed by Lloyds Banking Group, over B.UK, the Bermuda based holding company that operates the Telegraph Media Group, again demonstrates that any business no matter how well known and long established can run into financial trouble.

In this case the concerned creditor, Lloyds Banking Group, had security and was able to appoint receivers to look after its interests. Often SME’s are not in the privileged position of having security as a safety net to fall back on.

So as an SME owner what can you do to prevent incurring losses when a customer gets into financial difficulty?

Prevention is better than cure!

This old adage certainly applies to debt. When taking on a new customer do your homework, especially if the pipeline (and potential exposure) looks to be significant.

• Have a look at the Companies House website, what do their most recent accounts look like? Are their filings up to date?
• Look at the credit reference agencies, what do they say about their credit risk?
• Do a general internet search (it is amazing what five minutes online can turn up).
• Speak to people in your industry, what is the general feeling about this customer?

A combination of the above factors should help to paint a picture and ensure you go into any new customer relationship with your eyes open.

Get the contract right

It is important that you have certainty in relation to contract terms. The best way to achieve this is to have bespoke contracts/terms and conditions, ensure that they are provided to the customer and are the last step in negotiation and therefore incorporated in the contract.

Consider what terms are appropriate on a customer by customer basis:-

• If you offer credit terms, should they be reduced?
• Should you only offer to trade on a pro-forma basis?
• If you are selling goods, do you have a retention of title clause and is it effective?
• Should you be seeking a personal guarantee from a director?

Pro-active credit control

The key to good credit control is to have agreed processes and sticking to them. It may be a gentle reminder as soon as a payment term is exceeded, a more forthright chaser after seven days, the threat of legal action after 14 days, and instructing solicitors after 21 days.

The fact that you are on the ball and consistent will help get your invoice to the top of their pile. The quicker and louder you shout the more likely you are to get paid and flush out the can’t pays, from the won’t pays.

Chasing quickly can also draw out any client issues and allow you to get they resolved. It should also allow you to assess the risk of continuing to trade and stop supplying (and your exposure increasing) more quickly if appropriate.

What we can do 

If this article resonates with you and you have debt/s that you are concerned about or you think that your contracts or processes could do with tightening up please contact our solicitor Stuart Love, 01327 301771 or slove@rollasons.com