Well drafted terms and conditions are a good place to start. Your terms and conditions should give you the right to suspend supplying goods and services if the customer falls behind on their payments or if you have reasonable fears that they might be near the brink of insolvency. Whilst this can’t get you your money for goods and services already supplied, it stops a bad problem becoming worse.
Some terms and conditions have “retention of title clauses”. Whilst the principle – “if you can’t pay, we’ll take it back” – sounds appealing, the reality is somewhat different. The effectiveness of these clauses is highly restricted and can lead to costly disputes.
In complex or costly transactions, businesses may need to consider security, but this can be commercially very difficult. Businesses with a significant exposure to bad debts might also consider obtaining credit insurance.
Terms and conditions are, however, only part of the solution.
Spot the warning signs
It might seem obvious, but businesses headed for difficulties often have to choose who to pay. This might mean increasingly late payment of invoices, but there can also be more subtle signs. Persistent querying of invoices or complaints about work might be used to negotiate smaller payments.
Persistence can pay dividends, but businesses prioritise. You are likely to be in competition with lots of other creditors all vying to get payment.
Don’t bury your head in the sand
It might be tempting to think that your customer is having problems that will blow over. Whilst action has to be proportionate to the amounts of money involved, don’t let debts rack up. This not only causes serious cash-flow problems, but it will also increase your exposure if your customer does go under. Put simply, you can’t be paid if there isn’t anything to pay you with.
Although threats of legal action can sometimes persuade businesses to pay up, once insolvency becomes inevitable there is often very little that can be done to recover your debt. Taking action as soon as you see warning signs might avoid that happening.
In an insolvency situation there is a strict order of priority for creditors. As an ordinary supplier and unsecured creditor you will likely get only a small fraction of what you are owed. Whilst this is bad news, it will be worse if you do nothing. A failing business will carry on racking up debts, putting extra pressure on what’s left to go around. It’s therefore far better to limit the damage by acting quickly.