How Do I Avoid Issues With Debtors?

Debtors failing to pay money they owe on time can be highly stressful for a business, as cash flow is vital, and debtor problems can lead to financial difficulties. However, prevention is always better than cure. There are various commercial and legal steps your business can take to prevent debt problems and issues with debtors. This article will set out some key commercial steps to help you avoid debtor issues. 

Guide to Resolving UK Business Disputes

This guide outlines how to resolve commercial disputes.

Download Now

Why Should You Be Proactive to Avoid Issues

From the outset, every business should have a plan in place to avoid potential problems with debtors. Failing to do so could result in serious cash flow issues and having to chase outstanding debts. Although there are legal options to assist with the recovery of debt (both informal and formal, e.g. taking the debtor to court), you should first try to avoid such problems from happening in the first place. 

There are various ways you can prepare your business in advance and prevent the risks of debtors not paying you on time. Below are some key tips to help you prevent issues with debtors. 

Key Tips to Avoid Issues With Debtors

1. Carry Out Customer Due Diligence 

Before you work with new customers, it is worth conducting some due diligence on them. For example, you could research them to see how long they have been established and whether they are a long-standing business. This may help you gauge whether they will be good customers who will pay your invoices.  

At this early stage, you may spot potential issues and can make an informed decision about whether you wish to work with them. 

2. Have a Business Contract Which Sets Out Your Payment Terms

A business contract with your customer is a key legal document for your business. In fact, it is often drafted to help protect you when things go wrong. Clear and robust payment terms in your customer contract are critical to avoid issues with debtors. 

Your contract should set out the following:

• exact invoicing and payment dates so customers know when they need to make payments; 
• what happens if customers pay late – commonly, interest will accrue for late payments. Interest clauses can be very effective, as you can use them to prompt customers to pay and remind them that interest is being added to the sums they owe you; 
• a specific invoice dispute resolution clause in your contract to set out a procedure to informally resolve invoice disputes with customers; and
• the products or services you will be delivering and when.
  • Having clear terms documenting the obligations of each party can help avoid payment disputes later down the line. For example, mismatched expectations commonly cause customers to complain and fail to meet their payment obligations under a contract. 

You may also wish to consider including commercial terms to protect your business, such as requiring customers to pay you upfront or pay a deposit for your products or services. This could also reduce the risk of non-payment. 

3. Follow Your Own Payment Terms

Once you have delivered your products or services, ensure you follow the invoicing terms set out in your contract.

Ensure that you:

• invoice your customers on time and for the correct amount they owe you (it is often sensible to use a separate Purchase Order or Order Form documenting, clearly setting out the cost of your products or services); 
• provide a simple payment process that makes settling invoices easy for customers; 
• securely save copies of your signed customer contracts and invoices, and
• keep track of when customers owe payments so you remember when debts are due. It may be sensible for your businesses to use software to help keep track of invoice payments and when they have been settled. 

By taking the steps outlined above, you will be more confident with your invoicing procedures, which will help avoid possible issues with debtors later down the line. 

Key Takeaways

No business wants to experience problems with debtors not paying them on time. It is always better to be prepared, so you should be proactive and put early processes in place to avoid potential issues with debtors. Implementing key steps (such as having robust contractual payment terms) may save you time and cost in the long run. 

If you need help with strategic commercial advice to avoid issues with debtors, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.