It would be normal to think that invoices are generally disputed by customers on the grounds of some legitimate technical reason but the act of disputing an invoice has wider ramifications for the supplier.

 

Going to court should always be the option of last resort but part of the process leading up to an appearance in court involves the issuing of a statutory demand.

As David Walker from Cashflow Rescue points out in our second interview with him, a statutory demand is:

“…a final step before a winding up petition is drafted and served on the client. It is a single form and there are no fees to pay. However, you can only send it in certain circumstances.” 

Namely:

“…the debt must be undisputed. If it is a disputed debt, even if the reasons for disputing it would never win in court, you cannot serve a statutory demand.”

 

Statutory demands are effective because the recipient will most likely know, or shortly find out, that the next step is for the debtor company or individual to be declared bankrupt.

As such disputing an invoice could be used as a blocking tactic by a savvy and unscrupulous customer. Sadly, according to David, this is not uncommon however he has developed strategies to deal with this kind of situation.

 

All that said it would be preferable to avoid having disputed invoices in the first instance.

Knowing if a customer that you are about to do business with has, in the past, disputed an invoice can help you prepare for such an eventuality.

In every rating made on The Prompt Payment Directory, contributors are asked if the invoice has been disputed or not. To avoid the possibility of having invoices disputed, suppliers can take the following steps:

  • Make sure you know exactly what information is must be displayed on the invoice.
  • Make sure you know who the invoice should be sent to and in what format.
  • Make sure you know exactly when the invoice should be sent.
  • Make sure there are no spelling errors.
  • Make sure you have the customer’s address and contact details correctly displayed on the invoice.
  • Make sure you have not forgotten to include the purchase order if one was supplied.
  • If possible make sure the goods or services you have supplied have been signed off by the customer.
  • In advance of doing the work or delivering the goods make sure you know exactly what is expected in order for the job to be considered complete by the customer. If possible have this agreed upon either in the body of the contract or in an appended clause.
  • Make sure you know who is supposed to sign off on the completed goods or services.

These are not just exercises in covering your back, they’re good housekeeping. Larger organisations have complex systems in place for managing cashflow and minor slips-ups can cause invoices to get caught up in them.

Above all, get to know your customer and do your due diligence in advance of going into business.

 

Legal action is a big step to take when recovering overdue invoices.

While it is often effective, lawyers are expensive and there is no guarantee of recovering the debt or the fee.

Fortunately there are other options.

 

Research published by the Federation of Small Businesses (FSB) in November 2016 shows that the average amount for an overdue invoice is £6,142.

David Walker from Cashflow Rescue points out in his book that for amounts below £10k the legal system prevents your solicitor’s fees from being recovered EVEN if the case is won.

As the amount of the debt decreases the cost of legal fees as a proportion of the outstanding debt goes up. If the legal fees can’t be recovered then the consideration process shifts away from legal action and possibly towards writing off the debt.

There is an obvious problem, with the average size of an overdue invoice being £6,142 many businesses will feel that legal action is not worth the cost. This is perhaps why so many businesses eventually go to the wall.

In the same research the FSB point out that were it not for late payment an additional 50,000 businesses might have been saved from having to close their doors permanently.

Leaving aside invoice financing as a means to freeing up capital there are several other low cost actions that suppliers can take to recover debts and mitigate the problem. They broadly fall under two headings:

  1. Initiate D.I.Y legal proceedings
  2. Carry out effective due diligence in advance of going agreeing a contract.

 

Initiating legal proceedings on your own

You will need to consider this in context of the size of the outstanding debt and whether or not it’s disputed or undisputed. However, it isn’t as daunting as it sounds mainly because there are a few actions that can be taken which generally lead to a favourable outcome before the situation ever goes to court.

 

Option 1

Probably the first option to consider is the issue of a letter before action . Users that register with Prompt Payment Directory can obtain a free LBA template, supplied by Lovetts Solicitors, in the My Resources section of the account area.

A letter before action is a letter warning your customer that court proceedings will be started if the debt is not paid. Going to court should always be considered a last resort and the court will expect that all efforts be exhausted before issuing a legal claim.

A letter before action is that final opportunity for a debt to be settled by the debtor, however it’s also a bit more. In most cases debtors will understand the gravity of the situation and find a way to pay up upon receipt of one.

 

Option 2

Another option is the issuing of a statutory demand. More information on how to do this can be found via Cashflow Rescue. However, in essence a statutory demand is the beginning of the formal legal process for recovering a debt.

Probably the most important role it plays is to signify to the debtor that you are serious about recovering the money owed to you. Links to the various forms can be found here.

 

Option 3

A more heavy handed option is to issue a draft winding up petition.

A winding up order is a court order that forces a company into liquidation. These are issued by the courts when all other efforts have failed and a creditor has presented a winding up petition to a court with the intention of obtaining a winding up order as a means to retrieve funds from the overdue invoice.

A draft winding up petition signifies intent but does not require involvement from the courts and as such costs less. Lovetts report that in cases they represent, 4 out of 5 debts are paid when draft winding up petitions have been issued to the debtor.

 

Option 4

The final option is to follow the procedure set out by Cashflow Rescue.

This low cost, easy to use, self administered service was created specifically to help creditors with individual outstanding debts of less than £10,000 recover those debts, through the courts if necessary, without the costs of legal fees.

The process can also be used in cases where the overdue invoices amount to more than £10k and anecdotal evidence shows it to be a very effective process.

The clearly laid out framework puts the creditor in control of the debt recovery process and the associated costs. For adaptable small businesses owners that are used to wearing many hats this should not prove too daunting.

 

Effective due diligence

Ultimately it’s preferable to simply not be in the position where invoices are overdue. The best advice here is to get to know your customer as much as possible in advance of doing business.

Additionally, just as with the principle behind Cashflow Rescue, suppliers can begin to make a difference and join the growing number of contributors by anonymously sharing their experiences of payment, both good and bad, on the Prompt Payment Directory. In doing so there are four benefits:

  1. All contributors making their first rating will receive 12 months FREE subscription to The Prompt Payment Directory
  2. Subscribers to The Prompt Payment Directory can search for potential or existing customers to see if they have been rated and if so what their score is. Where companies have been rated and payment was overdue, some context may also be available in the form of an explanation given by the debtor as to why the invoice has not been paid or was paid beyond terms. This will help potential suppliers to more effectively understand the risk level and compensate for it.
  3. Subscribers to The Prompt Payment Directory will also receive access to free resources in the user’s account area, these will help in debt recovery as well as debt mitigation.
  4. Contributors to The Prompt Payment Directory will be taking a positive step towards creating a business environment that espouses transparency and promotes prompt payment.

 

ACKNOWLEDGEMENT: With thanks to David Walker of Cashflow Rescue for his feedback on the writing of this post.