It Always Pays to Act Quickly and Effectively to Avoid Bad Debts; Should Firms Be Ditching Late Paying Customers as Business Conditions Worsen or Give Them More Time? Paul Caldicott, Insolvency Lawyer at Morgan Cole's Cardiff Office, Says Tough Action Has Never Been More Important
Byline: Paul Caldicott
WOOLWORTHS, Lehmann Brothers and MFI - these are just some of the more high profile casualties of the downturn. And they will not be the last.
The Government is seeking to stimulate the economy by various economic measures, but the question remains as to how long and how deep will the recession be?
Whatever the answer, only those businesses that seriously consider the risk to their finances will come through.
Those that take expeditious and protective steps to limit their exposure, particularly to customer insolvency, are more likely to survive the current economic climate than those that do not.
It is often suggested that 80% of business comes from 20% of your customers. Therefore, businesses should rank their clients by value and give a full credit check to those clients who provide 80% of their sales and briefer checks to the remaining 20% of their business.
Also it is vital to regularly update those credit checks for early signs of default.
Review your own credit limits and do not allow excessive debt to be incurred on any one account regardless of how well you think you know your client.
Consider setting a maximum amount you are prepared to be owed regardless of current sales figures.
Consider taking references.
Trade/customer references are often the most useful but only use those selected by you and not your potential client. Make it easy to give the reference by providing a pre-printed form and indicate that you would be prepared to provide similar references.
Bank references tend to be of limited use as they use standard phrases. If you receive anything less than "good for your figures" from a bank then that is a guarded warning.
Ask whether your contracts actually reflect the way you do business and will they protect you against customer insolvency.
Review your contracts regularly and in particular ensure that your contracts contain clear payment terms and an effective retention of title clause (ROT).
The ROT clause is especially important on customer insolvency and should make clear that you retain ownership of supplied goods until not just the goods supplied under the invoice are paid for but also all other amounts owing to you by the customer. …