Creditor Crunch: it has never been as important for recruitment consultants to keep on top of their debtors Recruitment Consultant Magazine

Published on 1 Jun 2009 under category: article

By Anya Bloom, Consultant at Cubism Law

As published in the Recruitment Consultant magazine (Issue 82, June 2009 ed) and on the Recruitment Consultant website: www.rec-con.co.uk

It has never been as important for recruitment consultants to keep on top of their debtors as it is in this challenging economic climate. The Financial Times reports “Company failures rose sharply in the first quarter of the year. Insolvency Service figures show that 4,941 companies went into compulsory liquidation or creditors’ voluntary liquidations. This is a jump of 56 per cent from the same period in 2008 and a 7.1 per cent rise on the last quarter of 2008.” Data compiled from the last recession suggests these figures will keep rising well into 2012.

You need to avoid becoming one of these statistics and one of the best ways of doing that is to avoid being a creditor of one of the companies that does go bust. If one of your clients goes into liquidation then you are unlikely to get paid anything at all. The financial well being of many companies of all sizes is precarious. Even those that are apparently trading well are vulnerable to finance being withdrawn with little or no notice, or a major customer being unable to pay its bills. How do you ensure that you are at the front of the queue when it comes to getting paid?

The way you do business

The first thing to do is get creative. Sensible trading terms in boom years are not sensible in the bust ones. 30 days credit is too long. All businesses are demanding longer credit terms and I am sure you are doing the same thing to your suppliers. However, you should stand firm and insist on shorter terms. If the client says they will go elsewhere where they are being offered better terms then let them. This may look like commercial suicide but consider the risk of doing the work and not getting paid.

Insist on fees upfront. Many businesses are failing credit checks. Those businesses cannot expect you to bear the commercial risk of them being unable to pay their bills. In the last recession I acted for a very large recruitment organisation that was concerned about its exposure in the contractor market. Many of its established clients were failing credit checks but the recruiter did not want to turn away the business.

They dealt with the problem by insisting that their clients paid a deposit equivalent to the notice period in the contract which was held in my firm’s client account until the contract expired/was terminated. If all sums due had been paid, the deposit was returned to the client. You might expect clients to be very resistant to this but they were not. I did not hear of a single deal being lost because of this policy.

An alternative to this, but very unpopular with clients, is to insist on personal guarantees from directors. If a director will not give you one, you need to draw your own conclusion about the viability of the underlying business.

The back office functions

The back office functions become critical in difficult times. You need to ensure that having done the deal, it is immaculately documented and executed. You must assume that clients will take advantage of any deficiency in the paper work or failure to deliver.

A frequent problem that arises is the identity of the client. You must make sure this is right. If it is wrong then the recovery process will be severely prejudiced. I recommend checking each client name at Companies House to ensure it exists in the name that you have, and that the details match those you are working with. You will then have the unique company number. This easy check will also weed out any partnerships, sole traders or trading names.

The recovery process

Start early and assume the worst! This is a depressing place to start but the only sensible one. Assume if an invoice is outside its credit terms there is a problem. Talk to your clients. Visit them. Write to them.

It is a good idea to have an internal process that is applied in every single case that runs alongside any discussions. I suggest that letters are sent on the day after the last day for payment and then at 5 day intervals for no more than 3 weeks. The letters should be sent to all debtors, regardless of the status of the client or whatever promises to pay may have been made. An individual dealing with a client can distance themselves from the correspondence, blaming the accounts people. What you can’t do is generate the correspondence retrospectively when it is apparent you need it!

If payment is not made within a very short period of time, you need to take decisive action. There is a reason you have not been paid and it isn’t because the bookkeeper is on maternity leave. Almost certainly it is because the client is juggling its cash flow and paying he who shouts loudest first.

There are a number of tools at your disposal. Choosing the right one depends on the surrounding facts, for example is there a dispute of any kind; the status of the company, for example do you know of any other creditors and, most importantly how loudly you want to shout.

Interest

Do your terms of business provide for interest to be payable on late payment and if so at what rate? If the rate is linked to the bank base rate then that needs to be changed. Far better at the moment is not to provide for contractual interest but to rely on the County Court Act 1984. That entitles you to interest at 8% per annum, which at the moment is very attractive.

The % can be changed by Statutory Instrument but I am not aware of any immediate plans for that to happen. I hope none of this is of any relevance to any of you! Long may your clients pay your bills on time.