This article was written by Michael Buckworth, a partner in Buckworth Solicitors. Buckworth Solicitors is a London based law firm specialising in assisting start-ups on a range of matters. The firm works solely on the basis of affordable fixed fees and was set up at the beginning of 2011.
One of the biggest problems for small businesses is getting paid promptly by their customers. Increasingly customers choose either to delay payment to improve their own cashflow or attempt to renegotiate the cost of a product or service once it has been received or performed.
Preparation is key
The key to ensuring prompt payment and to prevent customers from forcing you to reduce your charges after goods or services have been provided is to regulate the relationship upfront. All businesses should have in place robust terms of business and/or contracts which are in writing and binding on all customers. The terms of these agreements should cover the following:
- the obligation to pay for the goods or services and a clear description of the charges payable;
- a provision stating when payment is due. A good formulation is that payment is due within 14 days of the supplier providing the customer with an invoice for the services;
- a provision stating that interest at a specified rate will be due on late payments;
- where appropriate, the ability to suspend provision of goods and/or services where there is an outstanding balance owed to the supplier; and
- where appropriate, retaining title to goods until full payment has been made.
Following the right procedure
In order for sums to be due and payable, they must have been demanded. Every company as a matter of course should send invoices to their clients stating clearly the amount due, the payment term and what goods and/or services the invoice relates to. The payment term should reflect that set out in the terms of business or customer contract.
On expiry of the payment term, the sums become due and payable. At this point, if the sums remain unpaid, the supplier should send a polite reminder to the customer pointing out that the invoice has not been paid and requesting payment as soon as possible, but in any event within seven days.
If payment has not been made by the expiration of this period, the supplier should write again to the customer in formal language requesting immediate payment. This letter should warn that the supplier reserves the right to take certain steps if payment is not received by a specified date. These steps might include terminating the contract with the customer, suspending provision of the goods and/or services, seeking return of goods to which the supplier has retained title and commencing legal proceedings for recovery of the sums due.
Many business owners find it difficult to chase clients for money, especially where the client is a regular client or where there is a personal relationship with the client. In such circumstances, a useful technique is to appoint an existing employee or other third party as a "financial controller" to chase payments on the owner’s behalf. This removes the psychological conflict faced by the owner and enables the supplier to formalize the correspondence with the customer.
Taking Legal Action
The last resort for businesses owed money should be legal action. However, where a customer has failed to pay despite repeated demands, it is worth asking a solicitor to send the customer a request for payment on your behalf. This will generally take the form of a final demand in which will be set out the basis of the supplier’s claim, the exact sums due and the legal steps that may be taken if the relevant sums are not paid.
For claims of less than £5,000, claimants can use an expedited procedure using the small claims track of the County Court. Claimants must pay court fees which range between £25 and £100 (depending on the size of the claim) for claims less than £5,000. The process is relatively automated and user friendly. The claimant must fill in a form and provide a detailed statement of case setting out the basis of his claim. This must be filed with the local court (either in person or through an online portal called MoneyClaim Online
). The application will be provided to the customer who will have a chance to file a defence.
If the customer ignores the application, the claimant can apply for judgment in default. If the customer defends the application, the case may go to trial.
Claimants should be aware that additional fees may be payable to the court depending on how the case progresses. In particular, if a claimant secures a judgment against the customer, but the customer fails to pay, the claimant may have to undertake further court action to enforce the judgment.
Legal action can be taken by suppliers without the need for a solicitor. However, suppliers considering this action should be aware of the importance of complying with the Civil Procedure Rules
(which are rules governing the information that must be provided by a claimant to a customer and at what time). Failure to comply with the CPR can have serious consequences when it comes to the court’s award of costs at the end of the case.