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External assistance

Learn how to manage credit and debt effectively with this free sample chapter from the FPB's Credit Control Guide.

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This content is taken from our online Credit Control Guide, available as part of Intermediate and Advanced membership. If all your internal procedures for collecting debt have been tried and the customer has still failed to pay the debt, it may be necessary to turn to external assistance. The following forms of external assistance are available to you: debt collection agencies solicitors commercial mediation services arbitration, insolvency proceedings County Court and High Court proceedings. Intermediate and Advanced members of the Forum are also eligible to apply for the debt recovery service. Debt collection agencies Late payers usually respond more quickly to debt collection agencies than to a business acting on its own. Agencies will be especially useful if you have limited time to chase debts. Debts should be referred to debt collection agencies as soon as all the internal steps to recovering debt have been exhausted. The older the debt, the more difficult it is to collect. Disputed debts are not usually appropriate for agencies. Charging policies Most agencies charge a percentage of the debt recovered as commission. This can range from 1% for larger debts to around 10% for smaller ones. Some agencies work on a ‘no collection-no charge' arrangement, while others charge only a very small non-collection fee. Selecting a debt collection agency You would be advised to consider the following factors when selecting a debt collection agency: Performance - this is possibly the most important of all the selection criteria. It is obviously worth paying more for a firm that collects 80% of debts than for one that collects only 60%. The speed with which debt is recovered is also of paramount importance. The firm should be licensed under the Consumer Credit Act 1974 which has been amended by the Consumer Credit Act 2006. Licences are issued by the Office of Fair Trading. The firm should ideally be a member of the Credit Services Association (CSA). Members of the CSA are required to adhere to a code of practice and are covered by professional indemnity insurance. Although the CSA does not recommend firms, it will send enquirers a list of its members. Level of charges and charging policy. If charges are based on commission, what is the percentage and does this vary depending on the size of the debt? Does the firm operate on a 'no collection-no charge' basis? Requirements concerning age of debt and debts in dispute. Debt collection agencies are sometimes reluctant to collect old debts and may not consider disputed debts. Legal collection service. If the agency does not have the ability to take legal action consider a firm of solicitors who offer a computerised collections department, which is often cheaper and does not usually include commission charges. They will also deal with any disputed actions. Use of an agency letter service An alternative to the mainstream debt collecting service is the use of an agency letter service. This method is especially useful for smaller debts (under £400). A reminder letter is sent to the late-paying customer, bearing the agency's letterhead, which is followed by further letters of increasing severity if the debt is not paid. Often these letters are enough to scare the debtor into paying. The final letter warns that legal action will be taken if the debt is still not paid. Before allowing the process to proceed this far, it is advisable to consider whether you are actually prepared to take legal action; bluffing can be damaging as your debtors may not take future warning letters seriously. For further information on credit reference agencies, contact the Credit Services Association on 0191 286 5656 or visit www.csa-uk.com/csa. Commercial mediation (for disputed debts) For disputed debts, commercial mediation can be a useful method of reaching an agreement without having to resort to legal action. Due to the costs of mediation, which may exceed £200, this is only worth considering for larger debts. The major advantage of this process is that it is less likely to damage the supplier-customer relationship than the legal alternative. Commercial mediation requires the consent of both parties. How commercial mediation works If both parties have been unable to agree to mediation, the mediating organisation can contact the unwilling party to discuss it. Both sides will be asked to present a written statement to the mediator, which provides details of the dispute and copies of supporting documents such as invoices and correspondence. The mediator discusses the case with each party separately in private and in strict confidence. The mediator often only needs to spend two or three hours dealing with a case, although more complicated cases can take up to a day or more. If an agreement is reached, both sides will be asked to meet again and prepare a written settlement which, on the consent of each party, is legally binding. Mediation does not guarantee an agreement, but both parties are free to go to court if they are still dissatisfied at the end of the process. Costs Costs vary from £60 to £150 per hour. An estimate is given early on in the process. Non-court arbitration (for disputed debts) Arbitration is used for disputes between two parties but, unlike mediation, the decision of the arbitrator is legally binding. Again, this is only appropriate for larger debts as the cost of arbitration can amount to several hundred pounds. How arbitration w orks Both sides must agree to the use of arbitration for the resolution of the dispute. Once the arbitrator has reached a decision, an appeal against it can only be made if one of the parties considers that the arbitrator has misunderstood or misapplied the law, or is guilty of misconduct. The arbitration procedure can require a considerable amount of paperwork to establish the conditions for arbitration and in preparing the case. Trade association conciliation arbitration schemes If the customer is a member of a trade association scheme, you can make a complaint to the association, which will begin by using the conciliation process, contacting your customer to arrange an agreement which is acceptable to you and them. If conciliation fails, arbitration will commence. The costs for arbitration will be borne by either the businesses in dispute or the trade association. Statutory demands A statutory demand is a formal allegation that the customer's business or that he or she is, as an individual, insolvent. If the debt is not paid within 21 days of the statutory demand being served, the creditor can file a petition for the compulsory winding up of the business, if it is a limited company, or for bankruptcy in the case of an individual trading as a proprietorship or a collection of individuals trading together as a partnership. Statutory demands can only be used when the debtor owes at least £750 in England and Wales and the amounts claimed are not disputed. To take this action in Scotland the debt balance needs to be in excess of £1,500. Statutory demands are inexpensive – the forms are available from legal stationers for a nominal cost and can have the advantage of eliciting a rapid response. They must be carefully drafted and fully completed to be an effective basis for the eventual presentation of a petition. In addition they must be handed to the debtor personally and not posted. When a business can actually afford to pay a debt, it will do so rather than risk being wound up or the individual being made bankrupt. If the debtor really is in a desperate situation, it is necessary to decide whether there is likely to be anything to be gained by filing the petition for the compulsory winding up of the company or bankruptcy of individuals. If a bankruptcy or winding up petition is presented, there is the risk that if there are other creditors owed monies by your debtor they can support your petition with the amounts they are owed. This means that if payment is received, the petitioning creditor be substituted by a further supporting creditor who must also be paid before the petition can be dismissed. If not, any funds recovered may well be clawed back by the eventual trustee in bankruptcy or liquidator. It is recommended that a solicitor be instructed to assist with presenting either a bankruptcy or winding up petition. The serving of a statutory demand is a fairly drastic form of action, which should only be used when the debt is undisputed or can be based on a court judgement. The serving of a statutory demand can scare a customer into paying. If the threatened action is not taken when the customer still fails to pay, the customer may not take your threats seriously thereafter. Trade credit insurance Trade credit insurance – also known as 'credit insurance' – offers protection against bad debts and late payment. Insurance against late payment is called ‘protracted default' insurance and is usually defined as debts that have been outstanding for 90 days after the due date. In the UK, the majority of trade credit insurance is for cover against bad debts due to insolvency. In addition, to safeguarding suppliers from late payment, trade credit insurance may also improve the supplier's credit-worthiness in the eyes of its bank. Hence, the bank may be more supportive if the supplier runs into cash flow difficulties caused by late payment. Export trade credit insurance Underwriters can offer policies specifically for insuring against bad debts and late payment from overseas customers. Some policies will cover domestic and overseas credit risks. The cost of exports trade credit insurance will not be much greater than for domestic trade credit insurance in the case of the more stable countries like France and the US, but may be more expensive in other countries. The Export Credit Guarantee Department (ECGD) is the largest provider in Britain of export credit insurance, but there are other organisations offering similar services. See www.ecgd.gov.uk for more information. How trade credit insurance works Trade credit insurers tend to tailor their policies to suit the needs of the business. Some policies will insure all debtor accounts, while others may be restricted to only a selection. Credit insurers will expect that certain policies are followed to minimise the extent of risk and some may require that their own credit checking systems are used before issuing credit. The efficiency of a business's credit management system can be a factor in influencing the cost of the premium. A formula for defining customer credit limits will also be laid down by the insurer. The credit insurer may refuse to insure credit for some customers; this might be a useful warning about this particular firm's ability to pay. The credit management recommendations of the insurer and its credit checking facilities can also be a substantial benefit. Under most policies, the insurer only covers a percentage of the debt – usually between 75% and 95%. It is also worth bearing in mind that claims for protracted default (late payment) are usually payable only after six months have elapsed from the date on which the default occurred. Where to find more information on trade credit insurance Trade credit insurance is a fairly specialised area of insurance. Some brokers who offer policies are interested in the small and medium-sized firms sector. Details of firms can be obtained from the Institute of Credit Management on 01780 722900, or at www.icm.org.uk, or the UK Credit Insurance Broker's Committee which operates under the auspices of the British Insurance and Investment Brokers' Association – see <A title="British Insurance and Investment Brokers' Association website" href="http://www.biba.org.uk /" target=_blank>www.biba.org.uk on 020 7623 9043.

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