Dealing with bad debts and overdue invoices
Business owners and managers will understand that cash flow is an important matter, and key to success. It may seem inconsequential for odd invoices to go unpaid, but, if the balance of unpaid invoices grows, this could affect daily operations, or even render your own company insolvent. Additionally, late payments can also have an adverse impact on cash flow and can quickly set the business back.
Securing prompt payment from your customers, whilst at the same time maintaining positive relationships can be a challenge. In this article, we look at ways to deal with bad debts and late payments on overdue invoices.
Initial approach to overdue invoices
If you are following your own procedures when it comes to charging your customers yet still have outstanding invoices, you will need to consider further action. The following steps might be helpful when approaching this situation:
Send an initial reminder
If payment is overdue, arrange for an initial reminder to be sent. The reminder should include a copy of the original invoice, confirmation as to the payment terms and the date on which payment fell due. Set a deadline for a response, and schedule reminders to follow up on the progress made.
Follow up with a telephone call
If payment is due from a regular customer, picking up the phone might be easier. Either way, make the call and discuss the reason for delayed payment. This will help you to understand whether the issue is an oversight, temporary, or potentially part of a more serious issue. At the very least it serves as a gentle reminder that payments should be made on time.
Upfront payments
Consider whether you can implement a policy of taking payment in advance (in part, or in full). This can prevent invoices from ever becoming overdue, and reduces the time spent in dealing with credit control issues.
Understand when it is time to escalate the matter
Putting unnecessary pressure on key clients could damage your existing relationship, and cause payment to be delayed even further. On the other hand, if a customer is consistently making late payments, then you may need to consider if the relationship is worth maintaining, and if not, follow up a with firm action.
When to charge interest on overdue invoices
The Late Payment of Commercial Debts (Interest) Act 1998 (“LPCD Act 1998”) serves to compensate the creditor for the late payment and deters late payment in the future. It only applies to the commercial supply of goods and services where you do not have a provision for interest in your terms of business.
The interest you can charge the debtor is referred to as ‘statutory interest’ calculated at 8% plus the Bank of England base rate for business-to-business transactions. You cannot claim statutory interest if there is a different rate of contractual interest. Further information can be found, here.
Recovering the cost of legal action
Legal action should be a last resort. It can be costly and you will need to understand that you stand good chance of making a positive recovery before incurring the associated costs. You can also charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it.
The amount you can charge depends on the amount of debt. You can only charge the business once for each payment:
| Amount of debt | What you can charge |
| Up to £999.99 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
These amounts are set by late payment legislation.
Protecting your business against bad debts
A bad debt is one which will not, or is unlikely ever to be collected. A trade credit insurance policy, often referred to as ‘bad debt insurance’ can protect against non-payment or the insolvency of a customer and can be obtained in relation to your entire sales ledger or simply your key customers. Such policies can help to mitigate the risk associated with new customers and existing customers circumstances.
VAT Bad Debt Relief allows the VAT element on bad debts to be reclaimed once the debt is over six months old (from the date the payment was due) but less than four years, six months old. In order to reclaim you must have paid the VAT over to HMRC and written off the debt in your company’s accounts. If your business operates the cash accounting scheme there is no adjustment for bad debts, as the VAT has not been paid over to HM Revenue and Customs (HMRC) in the first place.
Help from a Licenced Insolvency Practitioner
Keywood Group is a firm of Licenced Insolvency Practitioners with offices in Birmingham and London. Our team has extensive experience dealing with businesses and the challenges facing them. Please contact us for a no obligation chat.
