Yorkshire might have a reputation as being home to some of the stingiest folk in the country, however it would appear that Yorkshire business's supply chains are less parsimonious than those in other regions, given findings from a recent survey of business distress conducted by R3.

The insolvency body still found that 53% of businesses in Yorkshire had encountered indicators of business difficulty in the past year and that the most common sign of business distress was slow payment, which had been experienced by 23% of those businesses.  This figure weighed up positively against a national picture where 57% of businesses surveyed had experienced negative business indicators.

Slow payment is pernicious and contagious.  As one business is hit by late payment of debts owed to it, that business in turn may find itself unable to meet its own outgoings on time or at all or its ability to invest stymied.  The impact can be, and often is, felt throughout the supply chain and, commonly, one bad payor can cause any number of businesses to have to extend their debtor days so as to allow businesses higher up the chain to get back on their feet.  In the worst cases, the chain breaks.  This has been seen recently with two household names, in Carillion and House of Fraser, leaving great swathes of their supply chains out of pocket.

But what is a business to do if faced with the challenge of a late, or bad, debt?

Dealing with individuals

In October 2017, the new Pre-Action Protocol for Debt Claims was introduced.  This protocol applies to any business (including sole traders) which seeks to claim payment of a debt from an individual (note: this does not apply to business-to-business arrangements) and sets out the steps that a business will be expected to take when seeking to recover a debt from that individual.  Businesses should be alive to it, not least because in part it offers a helpful guide to the sort of information that should be included in a demand for payment and should help a business manage its expectations of the process against individuals.

With individuals, the prospect of losing future business should prove less of a discouragement to a business's decision to escalate its credit control and debt recovery process than when dealing in a business-to-business capacity, but the issue of enforcement is arguably more pressing when it comes to dealing with individuals who may have insufficient assets to be able to satisfy any judgment obtained against them.

Dealing with companies

Commercial considerations will weigh more heavily on a business's decision to aggressively pursue a bad debt owed by a company, given the attendant impact on future business particularly for businesses whose products are easily substituted.  It is arguably a less acute consideration where the business chasing the debt is specialist or hugely competitive on price, in which case a consumer company is more tightly-bound to repeat business, but the hit on goodwill that aggressive debt recovery methods may cause should not be underestimated.

Litigation should only very rarely be the first port-of-call.  It carries with it a far greater risk of damaging commercial relationships and curtailing future business than more collaborative or less formal credit control processes, usually being those that are internal to the business in the case of larger companies, or driven by the finance department as opposed to lawyers at businesses without a dedicated credit control team.

In some cases, very early steps can be taken to reduce the risk of late payment.  For businesses with small order books of high-value goods, customer due diligence can help.  Credit reports from the likes of Creditsafe and Experian, which are available to businesses for a small fee, can identify a company's cash balances, credit worthiness and often its creditor days.  Past conduct is often a good indicator of future conduct.  Practically, this is unlikely to be an option for companies with a wider pool of customers, and those businesses are likely to be better-served by more efficient and effective after-the-event credit control processes.

Ciaran Dearden is an Associate Solicitor in Freeths' Dispute Resolution team. The team have a broad range of experience including in relation to valuable debt disputes and issues regarding late payment. ciaran.dearden@freeths.co.uk