As we emerge from lockdown what practical steps could businesses make to keep cash flowing?
Given the uncertainty and impact on the economy caused by the Covid-19 crisis, we know that there are many customers that either cannot, or would simply prefer not, to pay outstanding invoices. So, what can you do to help ensure that you get paid as soon as possible, thereby maintaining your own cash flow?
We set out below 15 steps to enable you to get paid what you are owed and to help protect your position.
1. Adhere to Your Contract Terms for Payment
Your contract will most likely dictate how and when you should be paid by your customers (if they do not, you should consider amending your contracts / terms and conditions going forwards). Make sure that you raise invoices on time and in accordance with your contract terms. Too many businesses fail to raise invoices quickly – and you are unlikely to be paid before an invoice has even been issued to your customer.
It is also vitally important to understand what the contract terms are and to check that your terms and conditions were incorporated into the contract. If not, you may have to adhere to your customer’s terms and conditions of business.
To ensure that your terms and conditions are incorporated going forwards, you should ensure that customers are provided with your terms and conditions before the contract is concluded (they cannot simply be printed on an invoice) and, preferably, that they sign them. If a customer seeks to impose their own terms and conditions, exercise extreme caution and take advice, if necessary, to be sure that your terms prevail.
2. Changes to Payment Terms
Whilst it will not be possible or practical for all businesses, you may wish to consider a change to your payment terms. Rather than being paid after goods and services are supplied, consider demanding payment (or at least part payment) in advance.
In addition, consider imposing stricter payment terms on customers that have missed payments in the past. Also consider imposing / reducing credit limits for late payers.
- Consider the Location of Your Customer
The approach you take with a customer may depend on their location. If a customer is based in a foreign jurisdiction this increases the risk and the difficulty of recovering payment – even if a contract is governed by the law and Courts of England and Wales, enforcing a money judgment in a foreign jurisdiction can be tricky, costly and time consuming. You may therefore wish to adopt a more stringent approach with customers located in foreign jurisdictions.
- Maintain Strict Credit Control Procedures
If you have credit control procedures be sure to strictly adhere to them. If you do not have such procedures, implement some as soon as possible. We would suggest sending invoice reminders at regular intervals until payment is made – perhaps every 14 days. If payment is not forthcoming, those reminders should escalate in tone and you may wish to threaten Court or insolvency proceedings to recover the debt.
In all likelihood, those that are shouting loudest and chasing hardest will get paid first. Make sure that you are at the front of the queue for payment.
You may, of course, be chasing for payment from a long-standing customer that you wish to maintain a relationship with. If so, you may be reluctant to chase too hard for payment or be too aggressive. This is why communication is so important.
We would advise having a frank and open dialogue with customers. If they are not paying you, ask them to explain why. Are they having cash flow difficulties of their own? Identify within the customer the best person to speak to – perhaps the Finance Director or Managing Director – and keep lines of communication open.
- Consider Stopping Work
Often you will be owed money by customers that you are continuing to work for – perhaps you have a long term supply contract and you have your own obligations to fulfil to your customer. You will need to decide whether to continue supplying goods / services or whether to terminate the contract or pause supplies (if permitted by the contract). If you do not have a long-term contract, you will need to decide whether to fulfil any new orders from customers that owe you money.
This provides leverage – if a customer wants further supplies, you can demand payment of some or all arrears owing to you first. However, it also brings commercial risk – if you stop work, you may be unable to charge for supplies that are no longer being provided. If a long-term contract is terminated, you may be able to seek to recover losses. However, that might involve lengthy Court proceedings and there will be an immediate impact on your cash flow.
- Know Your Customer and Evidence
It is therefore vital to try to understand and weigh up whether a customer is going to pay you at some point or whether the customer is in serious financial difficulties themselves and may never pay you. Know Your Customer checks and evidence can help with this.
It is commonplace when first dealing with a customer to perhaps undertake identity checks, credit checks and to research them. However, how many businesses keep these checks up to date? It would be prudent, with all customers, to undertake regular checks.
If a customer has not paid you, hopefully through a frank conversation they will have told you the reasons why. If they say they have their own cash flow difficulties, we recommend asking them for evidence – both of the difficulties that exist and their plans / forecasts for resolving them. This may help you to decide on your next steps.
8. Acknowledgement of Debt
If a customer wants time to pay, we strongly advise asking them to acknowledge the existence and validity of the debt first. Businesses and individuals who are struggling to pay debts may challenge the validity of a debt or seek to dispute the quality of goods or services provided, as an excuse to avoid or delay payment.
To mitigate this risk, ask customers to document in writing that they accept the validity of the debt and have no concerns about the quality of any goods or services provided. This will help to prevent any later attempts by customers to withhold payment by disputing the debt.
You should consider whether it is appropriate to seek security over any outstanding debts. You may, for example, be agreeable to a delay in payment if a customer is willing to provide security for the debt. This might be in the form of personal guarantees from directors of a business or a charge over assets. If security is to be taken, this should be documented correctly to ensure it is enforceable.
If a customer is unable to pay all arrears in one go, consider whether an instalment plan can be agreed to at least ensure some cash is received. If payment is to be made in instalments, strict credit control should be followed to chase payments on the due date. Also include a provision that if any one instalment is missed, the entire arrears become immediately due and payable at that time.
- Interest and Costs
Your contract may stipulate that interest, costs or other charges become payable if an invoice is paid late. If so, consider demanding payment of these from your customers.
If not, remember that for business to business contracts the Late Payment of Commercial Debts (Interest) Act 1998 implies into qualifying contracts a charge for interest, a fixed sum and the costs of recovery. These should therefore be added to overdue invoices from the relevant date.
If a customer is simply unwilling to pay or cooperate or you consider that further action has to be taken to recover an outstanding debt, there are ordinarily two primary options available to formally escalate matters:
1. Court proceedings. A formal letter of claim should be sent to the customer, adhering to the provisions of the relevant Pre-Action Protocol under the Civil Procedure Rules. If this does not prompt payment, Court proceedings can be issued - the Courts are still operating during the Covid-19 crisis and most proceedings can be issued online.
2. Insolvency proceedings. If a customer appears to be insolvent, you may as a creditor petition for their winding-up or bankruptcy. Prior to doing so, you should (and must in the case of an individual) serve a statutory demand for payment on the appropriate form. The customer would then have 21 days to make payment and, if they do not, the demand stands as evidence of their insolvency and you may proceed to petition to wind them up or bankrupt them.
Do, however, be mindful of the temporary provisions introduced in response to the Covid-19 crisis that restrict the ability of creditors to pursue winding-up petitions. These restrictions will not remain in place indefinitely, but you should check the position before seeking to pursue insolvency action against a business.
An escalation may, of course, be taken or at least threatened as a way of applying pressure to a customer to make payment. You must, however, be mindful that both Court and insolvency proceedings can be expensive and, if you were to abandon them, could result in a liability for you to pay any costs incurred by the customer in responding to them.
Decisions to escalate should not be taken lightly and appropriate advice should be taken, if needed. Be mindful, for example, that even if a winding-up petition could be pursued, an unsecured petitioning creditor ranks equally with all other unsecured creditors in a winding-up so such action will not necessarily improve your prospects of recovering a debt.
- Retention of Title Clauses
If you have supplied goods to a customer, you may have a retention of title clause in your contract (if not, consider amending your contracts and terms and conditions for the future). A retention of title clause seeks to retain ownership of goods supplied until payment is made. If you have such a clause, consider whether or not it can be exercised to recover any goods supplied and thereby minimise your losses. This will not provide immediate cash, but you will be able to look at selling the goods to other customers to generate cash.
- Keep Records
It is important to keep an accurate record of discussions with customers – notes of telephone calls and copies of emails and correspondence. If you do need to escalate matters, then evidence that a customer accepts the validity of a debt could be priceless in proving liability.
- Be Pragmatic and Consider Settlement
It may be that a customer simply wishes to reduce their liability and does not want to pay or cannot pay the full amount of a debt. It may, however, be possible to negotiate payment of a proportion of the debt in full and final settlement. This may be a pragmatic way of keeping some cash flowing into your business.
If you are minded to discuss the settlement of liabilities with a customer, you should take care to ensure that any communication is undertaken on a “Without Prejudice” or “Without Prejudice Save as to Costs” basis. That way, if you cannot negotiate a resolution, your willingness to engage in such a dialogue cannot be used against you in later Court proceedings as evidence to show that you perhaps thought that the entire debt was not recoverable or valid.
If a settlement can be reached, consider how best to document this. We would recommend documenting this in writing so that everyone understands the precise terms agreed.
Langleys’ commercial and dispute resolution teams can support you in drafting terms and conditions, agreements and resolving disputes. For a confidential initial discussion please do not hesitate to contact us.