THE late payment of debts can be a scourge to any business, no matter what size. The effect is most acutely felt among small and mediumsized businesses, whose margins are much tighter and where late payment of a large debt can lead to such cash flow problems that the business goes bust.

There are a number of options for the creditor. The best answer is to keep a tight rein on accounts and agree a maximum level of debt with the customer.

Another option is to agree a strict payment deadline at the beginning of the business relationship. It may also help to amend your standard terms and conditions to provide you with the most favourable terms for payment should problems arise.

Where such procedures are not in place or where they are not followed, there are other means to recover outstanding money.

The most important element is to open a line of communication with the debtor, either on your own or through a third party such as a solicitor.

It is vital to ask what are the debtor's means and can he practically afford to pay the sums owed? The last thing a creditor wants is to expend time, effort and money on attempting to recover a debt only to find the debtor cannot afford to pay.

Sometimes a pragmatic commercial approach has to be taken and a repayment schedule agreed.

Where a negotiated settlement is not possible, the issue of court proceedings and statutory demands may be considered.

The issue of interest is most commonly addressed at this stage. Standard terms and conditions may make provision for the payment of interest; without such terms the Late Payment of Commercial Debts (Interest) Act 1998 provides the creditor with a statutory right to claim interest at eight per cent above the base rate plus fixed recovery costs depending on the amount of the debt.

Where a creditor wishes to pay a premium and hand over responsibility for recovery, a factoring agreement may be the most sensible option. A factor agrees to take on responsibility for the debt and immediately pays the creditor a percentage of what is owed, commonly 75 per cent. In return, the factor will pursue the debt and any sums recovered will be his.

Published: 16/08/2005