How to protect yourself from bad debts

One of your roles as a director of a limited company is to manage your own cash flows and you should be prepared to do this.

It may help to ensure that reference is made to unpaid invoices in your contract for services, detailing exactly interest will be added to unpaid invoices as well as the credit period given before invoices are due to be paid.

However, don’t forget that even if you do not have this stated in your contract you still have a statutory right to add interest and claim compensation for debt recovery costs if your invoice is unpaid after 30 days. You may find it helpful to add to the following text to invoices:

“We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms”

Be accurate

You should always attempt to ensure that any invoice you send off has all the necessary information on it and is accurate – you should prevent any reason for an invoice to be returned unpaid for amendment. If an invoice is disputed the onus will be on you to resolve the issue.

Act reasonably

If you have a good relationship with your agency or client company at all time you should be able to successfully resolve any disputes. Don’t make idle legal threats without discussing the situation first.

Credit checking

A more thorough method of protecting yourself is to credit check the agency or company that you will be invoicing. A credit check agency should be able to give you a recommended credit rating based on customer details, financial results, county court judgments and lending history. Some may even be able to give you the report instantly online.

This may seem extreme but if you are being paid four weeks in arrears you are potentially risking a lot of income in unpaid invoices if a company goes into liquidation owing you money.