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Creating a credit control strategy

With more late payment legislation in place, Charles Wilson runs through the options that finance have to control credit

NO ONE would question that credit control functions within businesses are vital – they ensure you get paid in a business environment where late payment is rife and in some quarters it could be argued, has almost become a badge of honour. But credit control can also be costly to run, shaving hard-earned profit off the bottom line. It’s just a fact of business life, isn’t it? Well, not necessarily.

Recent changes in late payment legislation have created an opportunity for businesses to turn their credit control function into a “profit centre”. It just requires some adjustment in your mind set and, more importantly, in your terms and conditions.

Currently, very few businesses set clear financial targets for the recovery of compensation from late payers and from cost recovery clauses in their terms and conditions. This is a cultural ‘hangover’ from the days when late payment was less prevalent, banks were decidedly less risk-averse, and bad debt didn’t have the dire consequence of business failure – as we have seen in the government’s business death figures, which are up 11% between 2011 and 2012.

What’s on offer?
Today, the culture of business and government is set to oppose late payment. New late payment regulations introduced in 2013 (The Late Payment of Commercial Debts Regulations 2013) mean that, along with the debt itself, you can claim interest, compensation and, for orders placed after 16 March 2013, your reasonable costs of collecting the debt where these exceed the compensation. Interest can be claimed at 8% over base together with compensation at the rate of £40 to £100 per invoice.

So how can businesses use late payment legislation to its full advantage, and claw back the costs of running a credit control team from those persistent late payers who make that expense necessary?

Crucially, late payment legislation only applies to the commercial supply of goods and services where your contract does not contain a provision for interest on overdue invoices (or any other substantial remedy for non-payment). Therefore, the first, critical step is to remove all references to interest or other compensation in your T&Cs to allow the new legislative terms to bite. You may wish to seek legal advice in the respect, particularly in relation to the recovery of reasonable costs.

Once this process is completed, make sure you update all documents on which your terms and conditions appear, and then circulate the new T&Cs to your customers and confirm when they will come into effect. It is important you do this as existing contracts will continue to be governed by the terms and conditions which applied at the time they were entered into.

Notify customers
You may wish to formally notify your customers as part of normal credit processes that you will claim late payment interest, compensation or costs if they fail to pay on time. Setting out the actual sums in a letter or phone call can provoke payment early on.

Both interest and compensation can be claimed on invoices that were not paid within the credit period but have since been paid – and you have up to six years to claim them. Compensation levels range from £40 for invoices up to £999.99, to £70 per invoice between £1000 to £9,999.99 – and £100 for invoices of £10,000 or more. This is intended to cover the cost of your collections team.

However, if you have to ‘go legal’ or use an external agency, you can claim this as well. You will have more chance of getting full recovery of costs if you have a contractual clause allowing you to recover indemnity costs – so seek advice and get this included in your terms.

As soon as a payment is overdue, you can, if you wish, claim the compensation and, in due course, interest. You can claim the reasonable costs of recovering the debt as and when they are incurred. You don’t issue an invoice for the interest, compensation or costs. You just write and tell your customer the amount due. It’s as simple as that.

In essence, the new late payment regulations means that your credit and legal costs can be covered, effectively putting credit control in credit.

Charles Wilson is CEO of debt recovery solicitors Lovetts

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