Four ways to avoid debt problems

We’d all agree that cash flow is the life-blood of any successful business. Yet for many owner-managers, profitability is being squeezed to the point of extinction, as the pressures of anaemic economic growth (for those lucky enough to be growing at all) and limited bank-lending are causing the availability of cash to dry up. 

And if we do start to see an upturn, many companies will struggle as trading levels go up and the costs of trading kick in. Poor debt and cash flow management can topple a business very quickly. Wouldn’t that be ironic after surviving a downturn? 

Now, more than ever, you need to manage and realise the cash resources you do have. Here are four simple steps you can take:

  1. Know your customer. Conduct credit checks against new customers and where appropriate, set credit limits. For companies, review their “balance-sheet health’ by downloading their latest accounts filed at Companies House. For owner/managers or sole-traders, consider asking for personal guarantees to cover any liabilities their business owes or may come to owe yours.                                                        
  2. Make sure you have strong terms and conditions. Do they clearly set out terms for invoice payment and provide for interest when late? Do they contain sufficient Retention of Title provisions where you deliver goods? Do they provide for termination for material breach of payment obligations? Do they sufficiently limit your own liability? Above all, make sure your customers have a copy of your up-to-date terms and conditions.
  3. Have a streamlined invoicing procedure. Make sure that all invoices are sent on time. Diarise due dates for payment and be prompt to chase late payers. 
  4. Where your customer has delayed payment, make a record of any payment promises and consider offering payment plans or discounts (while making sure you set short deadlines and stick with them). 
Invariably, the above cannot ever be a panacea to debt problems. There will always be those customers who simply do not pay. But by improving cash flow through following the advice above, you will have more resources to consider legal action against the worst offenders, should that become a necessity. 

Of course legal action is a big step that can damage any remaining goodwill between you and your customer. It’s a judgment call that only you can make; whether it’s best for your business to pursue the debt, or continue a relationship with a customer that, for whatever reason, struggles to pay. 

Ben Ashworth is a solicitor in the commercial dispute resolution department at SA Law LLP, specialising in debt recovery.

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