A Guide to Debt Collection

When should a business call in a debt collection agency?

Unpaid debts are an eternal thorn in the sides of most businesses – with small businesses hit particularly hard. Tardy payers can lead to problems with cash flow, difficulties in paying suppliers and even to insolvency in extreme cases.

It is simply not always feasible for businesses to chase every debt on their own, which is why many turn to debt collection agencies to ease the burden. But when can such organisations be used and when is a debt no longer collectable?

Customers who will not pay their debts will often be in some sort of financial difficulty. If they refuse to pay or talk to you about some sort of settlement agreement it is usually a waste of time and effort to continue chasing yourself: it is time to get outside help.

A solicitor’s letter threatening legal action will often prompt some to pay, but before you head to the courts it is worth exploring the use of a debt collection agency. This allows you to either sell the debt to them in its entirety (purchased debt), or the agency will often work to get the debt paid on a no-win-no-fee basis (assigned debt): either option means you not having to lay out more cash upfront in a bid to get the debt paid.

Debt collection agencies do not have any extra debt-collection powers, but they do have the time, experience and resources required to chase debts that you do not. In addition, if you choose a reputable one (always check they are registered with the Credit Services Association) who adopt a polite, professional approach, chances are you will keep the customer being chased and not lose business. They can also instruct solicitors on your behalf if the customer still refuses to pay.

On the flip side, if they adopt a heavy-handed approach this could damage your reputation and lose you business and, whether you sell the debt to them or have them work on your behalf on a commission basis, you will not generally recover the full amount of the debt as you will have to pay for their services. However, recovering some of the money owed to you is better than none so it is usually a price worth paying.

Exactly when a debt becomes ‘late’ will depend on the credit-control procedures and policies you have in place, historic payment information and industry-specific payment rules. In some sectors – for example, the construction industry– payment after 60 or even 90 days is not uncommon. Your terms of business should clearly state when a payment becomes late and you are allowed to pass the debt on to a third party to deal with.

A good guide to when a debt becomes ‘late’ is provided by the Late Payment of Commercial Debts (Interest) Act 1998. This allows commercial suppliers of goods and services, which do not have relevant provisions in their terms of business for unpaid invoices, to claim interest, compensation and reasonable costs of collecting the debt where these exceed the compensation.

If you do not agree on a payment date, the law says the payment is late 30 days after either the customer gets the invoice or you deliver the goods or provide the service (if this is later). If you agree on a payment date, it must usually be within 30 days for public authorities or 60 days for business transactions. You can agree a longer period than 60 days for business transactions – but it must be fair to both businesses.

You should not let the grass grow under your feet when it comes to debt collection as under the Limitation Act 1980 you, as a creditor, have six years to chase most unpaid contract debts. This ‘limitation period’ starts from the time of the last payment or acknowledgement of the debt from those who owe you money. If they do not make a payment or you do not hear from them within this six-year period, the debt becomes statute-barred and they may not have to pay the debt back.

For further information on debt recovery issues, please contact our litigation team on 01732 770660, [email protected] Warners Solicitors has offices in Sevenoaks and Tonbridge, Kent.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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