Unfortunately, it’s an all-too-common occurrence in the construction industry, particularly for contractors and SME building firms. Fortunately, there are ways and means to expedite payment and keep your cash flow in good shape. And having a professional debt collection agency on your side can be a real asset to avoid some of the potential pitfalls.
The problem of overdue debt is by no means exclusive to the construction industry. But it’s certainly one that plagues the sector and is a constant worry for many smaller businesses. In fact, it’s something which has become so embedded in construction supply chains, that it’s almost become accepted as a necessary evil.
Why debt can be toxic for smaller firms
One of the main challenges faced by smaller construction firms is finding the time to deal with debt collection. After all, your main priority is getting on with the next project and delivering good service to other customers. However, there’s a risk in letting things slip, so it may be a good idea to consider putting your debt management in the safe hands of a professional debt collection agency.
Many large construction firms both extend credit to other parties and provide labour or materials on credit themselves. Margins can be tight and many projects require substantial upfront cash commitments. However, as a general rule, the bigger the company, the more financial clout they have. And that means greater ability to live with delays in getting paid.
It’s a different story for many contractors who work for those bigger players and for smaller independent building firms. Overdue debt can be a ‘make or break’ issue. What’s more, because it’s often caused by the knock-on effect of issues and retentions further up the supply chain, it can feel like it’s out of your control.
The bottom line is that, whether you’re a main contractor or a sub-contractor, you deserve to get paid for work that you’ve done. So, what can you do to make sure you receive the money you’re owed?
The most important thing is to be on top of things from the get-go. That means clearly setting out payment terms in the initial contract, issuing an invoice promptly and following up with robust credit control, including sending statements and chasing letters, as well as staying in touch with the customer. Even if you don’t receive payment in full, you may be able to negotiate a part payment or a payment plan.
What are the next steps?
If normal credit control channels are not working for you, it’s time to take further action. And that probably means looking to the court system to help you get the money you’re owed.
Unfortunately, County Court actions generally progress quite slowly. This can be frustrating if you need the cash urgently to pay overheads, salaries or fund a new project. Having to follow the Pre-action Protocol for Debt Claims doesn’t help, making the process even more time-consuming.
Making sure you’ve got a robust paper trail can help strengthen your case. However, winning a court judgment in your favour is only the beginning. Enforcing the judgment and recovering the money you’re owed is the real challenge, particularly when you’re dealing with a debtor who is doing everything they can to avoid paying up.
With so much time and effort required, you may find that taking court action against a debtor has an impact on your ability to focus on your other commitments. Again, it may be wise to get professional support. A good debt collection agency will handle everything for you, ensuring that all the correct processes are followed and you have the best chance of a successful outcome.
What about using bailiffs?
If the reality TV programmes are to be believed, tracking down debtors and getting them to pay up can be as easy as sending in the bailiffs. Be warned, it’s not always that simple. Having obtained a County Court Judgment (CCJ), you may find that court bailiffs have little incentive to recover the debt. Unfortunately, they often take the path of least resistance, allowing the debtor to make an application to waive the bailiff’s warrant and pay the debt via instalments at a very low rate. Independent firms of High Court Enforcement Officers may be more persistent, but even their success rates are often lower than some TV shows may lead you to believe.
Is a CCJ the only legal route?
In persistent cases of debt default, there is an alternative legal route. And it can be very persuasive because it threatens the debtor’s assets and creditworthiness. Providing the case meets certain criteria and the minimum debt amount (£5,000 for an individual/sole trader or £750 for a company), you can serve the debtor with a Statutory Demand. This sets out details of the debt and gives them 21 days in which to pay. If the debt isn't settled, you can then petition the court for a bankruptcy or winding up order.
Can you recover your costs?
Under the Late Payment of Commercial Debt (Interest) Act, you’re entitled to charge interest on overdue debts. You can also recover the cost of taking legal action or other third-party collection costs, as long as this is clearly stated clearly in your terms of business.
Is there another solution?
Outsourcing your credit control to a professional debt collection agency (DCA) can give you time to focus on what’s really important — running your business. In many cases, an experienced DCA can recover payment in full, negotiate a settlement or set up a payment plan, without legal action being necessary. Sometimes, simply the act of putting your overdue debt in the hands of a DCA can persuade the debtor to pay up.
At Redwood Collections, we have extensive experience of handling debt collection for businesses in the construction industry. We’ll work with diligence, integrity and professionalism to achieve positive results and help your business Grow Stronger.
