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What impact will protocol have on ability to recover overdue invoices?

05/09/2017 / Comments 0

What impact will new protocol have on SMEs' ability to recover overdue invoices?

Chasing late payment through the courts looks set to get more difficult for creditors when the new Pre-Action Protocol for Debt Claims comes into force in October.

From 1st October 2017, any business trying to recover an overdue debt from an individual or sole trader will be required to undertake prescribed pre-action steps as set out in the Protocol.

The Protocol aims to encourage parties to communicate issues at an early stage and resolve the matter without the need to start court proceedings. This should keep costs reasonable and proportionate to the amounts involved.

However, it looks likely to offer another level of protection to debtors, whilst making the process of recovering unpaid invoices more cumbersome for creditors. For a more detailed summary on the Protocol, please click here.

FAQs: Pre-Action Protocol explained

Additional burden

Any business offering credit should review and adapt their existing credit control procedures to comply with the Protocol before it comes into force in October.

The Protocol will require creditors to be more pro-active when engaging with individuals and sole traders to ensure that information is properly exchanged, in the required formats and that time periods are met.

As a result, creditors will need to have considerably more patience when chasing outstanding debts – particularly as there is increased scope for delays in collection by debtors who will effectively be able to stall payment by up to 90 days.

For smaller businesses who may already have concerns about the cash flow issues being caused by late payment, this clearly presents additional challenges.

Although it should encourage businesses to be more selective about when and to whom they trade with on credit, there will be even greater pressure to act promptly when customers fail to pay on time in order to limit the impact on the business.

The silver lining

Whilst this process will put an additional burden on creditors that choose the legal route to recover what they’re owed, the changes could spark some positive changes in businesses.

Firstly, the prospect of the Protocol significantly elongating the debt recovery process is likely to be the catalyst needed to encourage businesses to improve their credit control processes.

By reviewing and adapting their processes from the outset, businesses can ensure they are doing all they can to prevent late payment from the start. (Take a look at some of our credit control tips to help you do this).

And, in the event that late payment does still occur, the increased mediation process could potentially lead to more successful outcomes.

From our experience as a leading debt recovery agency, personal, persistent and professional mediation is often more successful than legal action.

By communicating with the debtor at an early stage, it is often possible to settle disputes and come to an agreement without wasting time and money going through the courts.

This can also allow you to preserve customer relations and not burn any bridges that the legal route often does.

If your in-house credit control efforts are getting ignored, many automatically assume that going legal is their only option. But that’s not the case. In fact, businesses rarely respond well to legal action, and even securing a judgment is no guarantee of payment.

Instead, another way to encourage your customer to pay is to employ a specialist debt collection agency to chase the invoice on your behalf.

Often, the name of a debt collection agency is enough to convince them to pay the invoice. With extensive collections expertise, their knowledge and understanding of the way debtors think is proven to maximise the recovery of unpaid invoices.

So, you’ll regain the time and resource to focus on newer debts knowing that your overdue invoices are in safe hands.

Plus, these services are typically provided on a success-only basis, so you’ll only pay if your customer does.

What should I do now?

With the Protocol coming into effect in less than a month it’s vital that your business reviews and adapts its credit control procedures to ensure that it complies with the Protocol.

Failure to do so could lead to additional delays when chasing payments from individuals and sole traders, and missing steps from the Protocol could result in the court deeming your conduct unreasonable, potentially leading to financial penalties.

If your customers are refusing to make payment you should consider taking action before October as the existing requirements are much more favourable to creditors.

Contact us today on 0800 977 4848 to see how we could help your business get paid, or get an instant debt recovery quote to find out what we would charge.

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