The Zero Tolerance Approach to Bad Debt

Posted: Monday, 1 March 2010 @ 14:42

Things aren’t looking good. We hear on the news every day about the credit crunch, rising inflation and economic growth stalling. Most commentators are saying that things will get worse and stay bad for some time before they get better.

All this will inevitably mean that pressure will be put on cash flow. Your clients will be slower to pay (because of their own cash-flow problems), more bad debts are likely to occur and the bank is likely to be less happy about extending your overdraft.

We are finding that the economic downturn is often causing conflicts within different departments of our clients. Sales teams are finding it harder to get orders and so want to relax procedures, maybe by offering longer credit terms or undertaking less stringent checks on credit worthiness. Finance departments, on the other hand, are trying to tighten up credit control procedures and reduce the amount of overall credit given and exposure to the risk of bad debts generally.

It’s never good to have a business pulling in two directions and so it is important to make decisions on credit control policy in an open and balanced way.

Obviously, just how strict you are with credit control is a business decision and needs to be balanced with your need for sales, but now is the time (before things get worse) to review your credit control procedures - before you end up with problems.

We set out here the zero-tolerance approach to credit control. It is unlikely to be suitable for all but it should certainly be borne in mind when adopting your credit control policy. Deviations from it should be made consciously and with good reason.

Get money up front for all work

This way you won’t get into any credit control problems at all.

Personal guarantees 

Whenever you deal with a limited company, you should get the directors and owners to give you personal guarantees. Banks and others who lend money to companies wouldn’t dream of lending large sums without them, so why should you be different? It’s all too easy for a company that has cash flow problems to put itself into liquidation, and then you’ll just be one of many trying to recover what snippets you can – after the liquidator and the bank have taken their share of course.


If you’re going to be giving a lot of credit, get a charge over property, either company property (if it’s not already charged to the hilt) or the directors’ or owners’ property.

Standard terms and conditions 

When did you last review your standard terms and conditions? Do you even have them? Well-drafted terms and conditions can save you lots of money, time and frustration later on when you try to collect in what’s owed to you and your client then raises complaints about your work as an argument for not paying or delaying payment. In many circumstances you can limit your exposure to such claims, and that means a better chance of getting paid and sooner. However, be careful not to go over the top; they need to be “reasonable” for a court to allow you to enforce them and what is reasonable differs from firm to firm. These should always be drafted by a lawyer and never copied from someone else – their circumstances will be different and you could end up with a bit of paper that no court would take seriously.

Credit terms

How long do you give clients to pay? Do you give 14 days credit, or 30, or even more? Why? If you’ve done the work, why shouldn’t you be paid for it now? If your customers need credit, why should it be you that gives it to them, rather than their bank or credit card company? What are your sanctions against late payers? If you don’t have any, are you really surprised when clients don’t pay up in time? Are you entitled to charge contractual interest in your terms and conditions and is it at a rate that will make them think twice about borrowing from you rather than their bank?

“But they’re always a good payer”

We hear this every day. If a good payer suddenly falls behind with their usual good payment practice, this is the time to be very worried. They wouldn’t have fallen behind unless there were real cash flow problems. However, many businesses adopt the opposite approach and give them more leeway than usual. Don’t be one of them.

Consider taking court action

This is the one area where we don’t advocate a zero-tolerance approach. If you make a bad decision here, you could be faced with lengthy and expensive litigation you later wish you’d never started. There are different procedures available and which one is best will depend on many factors, such as the amount of the debt, the reasons that your client is not paying, how good your evidence is and the costs. See our article Steps to handling business disputes for further details.

Our Dispute Management Solicitor, Gary Cousins, can help by working with you to set up an effective credit control procedure. We can draft your terms and conditions so that they maximise your chances of getting paid - in full and on time. We can advise on whether to take court proceedings and, if so, the best procedure to use and will then fight your corner in court to give you the best possible chance of making a full recovery of the debt. Book an initial free telephone appointment with Gary Cousins here or call 0121 778 3212.

For free advice on this topic please call us on 0845 003 5639.

Blog by Sue Mann
Sue is an experienced commercial solicitor based in Birmingham from where she helps businesses all over the country advising on, drafting, and reviewing business contracts and commercial agreements. View profile
Call Sue on +44 (0)121 246 4437 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.


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Thank you. Your response is great, very straight to the point! Hopefully this will bring an end to the matter. I will certainly be recommending your services as I am very impressed with the prompt dealing of this matter.
Janet Burbidge

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