What would you do if one of your major customers went under, owing you a substantial sum? Would you be able to recover the outstanding debt – or reclaim goods they had not paid for?

Unfortunately, experience suggests that if you are an unsecured creditor you would be fortunate to recover a few pence in the pound – and in most cases you would receive nothing at all.

Your best course of action is to take precautions now to limit your exposure and minimise the impact on your business of any customer insolvency.

Basic precautions
There are certain basic precautions every business should take. Though these are largely common sense, we are constantly surprised by how often they are overlooked:

• Maintain an honest and open relationship with your customers and encourage them to share information with you
• Establish clear credit control procedures, make sure your customers understand them, and be seen to implement them firmly and consistently
• Check credit references before offering credit terms
• Do not extend credit limits without good reason
• Monitor customer accounts regularly

One of the first signs of difficulty is that a customer’s payment period begins to lengthen. If this happens, you need to act swiftly. You might, for example, arrange a visit to them to discuss the matter. Ask if you can see their accounts and projections. If you are still concerned, you might suggest that they take smaller deliveries more frequently until the situation improves.

Faster payment
Another way to limit your exposure is to speed up the payment cycle. You might, for example, consider:

• Restricting terms, say to 20 or even 15 days, and extending to 30 days only where there is a basis for confidence
• Specifying terms as ‘payment received’ rather than ‘payment sent’
• Including a reminder of your terms on your invoice
• Sending out a letter before the invoice is due asking for confirmation that the order was received – this pre-empts the ‘I mislaid/don’t remember receiving your invoice’ excuse

Contractual precautions
Other possible precautions include:

• Include Retention of Title clauses in your contracts to increase your chances of repossessing any unused stocks of your products held by an insolvent customer
• Where possible, obtain guarantees from directors or other group companies
• Where substantial sums are involved, consider taking out insurance against a customer’s failure to pay

Tread carefully
If a customer does get in difficulty it is not always advisable to instigate proceedings too quickly lest you precipitate action by larger creditors who have a prior claim.
In general, you have much more chance of recovering monies owed if a rescue plan is put into place rather than the company going into liquidation.
We can help
As you can see, this is a complex area and professional advice is essential if you are to avoid taking unnecessary risks.

• We can advise you on:
• Establishing effective credit control procedures
• Minimising the impact of customer insolvency
• Dealing with insolvent customers

Contact us today if you would like to discuss this matter further.