The problem of not getting paid is a big one for small businesses in the UK. Research has shown small businesses were owed £67.4 billion in unpaid invoices in 2015. This is up over a third from 2011 as companies feeling the financial pinch drag their heels on paying their suppliers.
Outstanding bills are a huge drag on small businesses’ cash flow and it can be potentially disastrous for you if a client goes bust without having paid you. The problem is that suppliers are at the bottom of the pile of creditors in an insolvency, with all the other unsecured creditors, and the likelihood is that you won’t get much of the money back that you’re owed. So it’s important to have some contingency plans in place to mitigate the impact if it should happen to you.
You want to try to push your claim for payment up the list of unsecured creditors – or, even better, make sure you’re not among the unsecured creditors at all. But how can you do that?
A good contract
If your company supplies goods to other firms then you can insert a clause into your sales contracts specifying that you retain ownership of those goods until they are fully paid for. Known as a ‘retention of title’ clause, it means that if your customer goes into liquidation then the insolvency practitioner cannot sell those goods to pay the firm’s other debts. They must either be returned to you, or the insolvency practitioner agrees to sell them on your behalf to pay your invoice.
For a retention of title clause to be legally binding it must be in a sale contract entered into by the client at the time the deal is struck.
Some firms think that if they have a retention of title clause within their standard terms and conditions published on their website or printed on the back of their sales invoices then it binds their customers because they have agreed to buy the goods. That’s not the case.
It’s much easier to ask a client to sign a contract containing a retention-of-title-clause or agreeing to your terms and conditions when you first do business together than when it is already in financial difficulties.
Get a guarantee
If you’re a firm supplying services to a customer then you’re in a tougher position, because you can’t take back the IT or marketing consultancy, for example, you’ve provided to a client if it goes bust. But there are a couple of options available if you’re worried about not getting paid.
You could ask for a charge over one of its fixed assets, such as its offices or factory, to the value of your contract or invoice, ensuring that you would get a share of the sale proceeds if it was liquidated. But it would be almost impossible to extract such a concession because the firm’s bank will have first call on such assets to pay off its loans.
You could demand payment upfront for your services or for cash on delivery. Or, if that fails, you could ask for a guarantee from the firm’s shareholders (perhaps a parent company) or from one of its directors that you will get paid. Another alternative is to buy credit insurance, which would pay out in the event that your client is unable to pay your invoices.
He who shouts loudest gets paid
Small businesses may often feel they don’t have the clout to extract guarantees from clients – in which case you will have to develop sharp elbows in the pushing and shoving that will ensue if one of those clients slides into financial trouble.
Your best option may simply be to shout the loudest before your client goes into liquidation. If, let’s say, a company has bills to pay totaling £20,000 and only £5,000 in the bank then it will have to pick and choose which creditors it pays off. It’s a fact of life that firms in this situation tend to give priority to those who make the most noise.
How can you as a small business make a big noise about an unpaid debt?
When a company is in financial difficulties its directors’ biggest fear is of being forced into liquidation, so the threat of legal proceedings for an unpaid debt that could result in it being wound up could prompt the sudden payment of a long-overdue invoice.
You can make a ‘statutory demand’ for payment, using a form which you can download and fill out yourself from the government’s website. Your client has 21 days to either pay your invoice or reach a repayment agreement with you – if not, you can apply to have the firm wound up. This can be a very effective way of ratcheting up the pressure on a company that has refused to pay you.
The threat of legal action can often be more effective in extracting a long-overdue payment from a company than actually carrying it out. For you won’t push your business higher up the creditors’ pecking order by simply having begun legal proceedings against a company by the time it goes into insolvency. You need to have a court judgment in your favour and have already got the bailiffs in to secure payment of what you’re owed before your client is wound up – otherwise you’ll be just any other unsecured creditor clamouring to get paid.
To have any realistic chance of getting what you’re owed then, you need to have a payment strategy in place long before a client goes bust. If you become uncomfortable with the size of the debt a customer is running up with you, or if the word on the grapevine is that it’s encountering difficulties, then it’s worth taking steps to try to protect yourself.
There are ways of making sure you are higher up the food chain of creditors, but they all require you to act before the firm enters liquidation. So, do not leave it too late – monitor all your debtor balances, and start making your contingency plans now.
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