Governance

Lovetts on tackling overseas debt

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Governance
Written by Charles Wilson, Chairman and Managing Director for Lovetts Plc   
Friday, 13 August 2010

A nudge in the right direction is often all it needs to get a payment made.

 

Charles Wilson, Chairman and Managing Director for Lovetts Plc, one of the UK’s leading debt recovery law firms, explains the steps businesses can take to tackle bad debt both when trading in the UK and with overseas businesses during the current economic climate.

With the effects of the recent worldwide economic downturn only slowly easing and the squeeze on cash flow continuing, businesses throughout Europe and the Americas are conserving cash by paying suppliers later than usual or not at all.  This slowing of cash flow puts pressure on suppliers who, in turn, put pressure on their own suppliers – and so the cycle goes on.

The rise of globalisation does not help in this area. Language barriers and cultural differences often slow payment and can lead to misunderstandings. All the same,  a nudge in the right direction is often all it needs to get a payment made without further delay no matter where the debtor is based. 

This is evidenced by what we see here in the UK.  Well over 80% of Letters Before Action (LBAs) issued by Lovetts on behalf of our clients chasing UK debtors achieve their intended aim and the case does not proceed any further. 

A more sobering statistic is the 24.6% rise in the number of Late Payment Demands issued by Lovetts in the first half of 2010 against 2009.  This demonstrates that many clients are grasping the opportunity to punish late payment via recovery of interest and compensation rather than just sending out a standard letter before action.

Late payment interest has taken a long while to be accepted by many companies. Ignorance of the legislation, how it can be adapted by individual companies and a fear of alienating clients, may be partly to blame but it’s clear that more businesses need to adopt this effective deterrent against persistent late payment in to their credit control procedures.  Currently just 38% of all claims issued by Lovetts on behalf of its customers currently have late payment interest and/or compensation applied.

So what else can businesses do to help stem what seems to be an endlessly rising tide of bad commercial debt?

It may seem basic business sense, but the starting point has to be solid credit management procedures, when dealing with customers based in the UK or abroad:

  • Make sure you know who you are dealing with by checking the true identity of your client and ensuring they are creditworthy through a credit check. There is an increased risk when dealing with a customer not based in the UK. If they are based in the Far East or Asia (for example) the chances of locating an errant business contact if they disappear is considerably less than in the UK.

  • Obtain acceptance of your Terms & Conditions in England & Wales.  For overseas contracts this will ensure contract formation within home jurisdiction

  • Make sure your paperwork is accurate and timely, leave no room for error

  • Resolve any queries promptly

  • Consider credit insurance cover

It’s also critical that businesses protect themselves against bad debt through a set of robust terms and conditions:

  • Ensure your Terms and conditions allow you to charge overdue interest and compensation for late payment

  • Consider including a clause so that you can claim immediate payment on invoices not yet due

  • Where you need third party assistance in recovering the debt make sure you can pass on the charges to the debtor

  • For overseas customers, make sure your terms give you the right to suspend on-going shipments when default occurs

  • Stipulate clearly that the law in England & Wales  governs  the contract

Of course the additional  challenge for exporters is to ensure rigorous processes are in place to tackle late payment when the debtor may be on the other side of the world and operates in a completely different language.   Agreeing which language will be used for the contract and subsequent communications is therefore a crucial starting point as is ensuring that when chasing payment you will be able to do so in your mother tongue.

It’s also worth remembering that if you litigate, documents may need to be translated and personally served on the debtor.

While all this groundwork won’t protect businesses from the risk of late payment it will put creditors on firm ground for any legal action necessary. 

Then next step is to get to the front of the queue for payments by making sure it's more expensive for your debtor to delay paying you.  This can be done in several ways:

  • A solicitor’s LBA implies (a) court proceedings and (b) costs being added to the debt. The cost of an LBA is tiny compared to the impact it generates

  • Late Payment legislation can be a powerful weapon in your armoury. Ensure you spell out your full claim for costs, interest and compensation in your first late payment demand letter to the debtor. The late payment legislation will only be an option for your business if your Terms of Business have no existing interest provision for late payment or expressly include direct reference to the legislation

  • Instruct debt recovery lawyers sooner rather than later. Delaying action only adds to the risk of not being able to recover the outstanding debt

We’re operating in a very changed and challenging economic environment.  So get the basics right first, know who you are dealing with, agree the terms and conditions of payment using compensation and late payment interest and leave no room for miscommunication through language difficulties for overseas contracts. 

With the bases covered you can then focus with confidence on getting business done whether you are trading with clients in the UK or abroad.
 

 
 
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