There are numerous ways to deal with unexpected debts from your clients.
IN THESE ECONOMICALLY straitened times, it is not only smaller business partners that get into financial difficulties - often substantial companies also fail, leaving in their wake trade creditors who might have little prospect of making any realistic recovery.
Every business puts an emphasis on credit control to get in much needed revenue; on the other hand, some organisations have deliberately slowed down their payment rate to suppliers to improve their own cashflow. Sometimes, debts may arise from an established or substantial customer where the recovery of the monies needs to be handled with care.
In this difficult situation, some travel management companies (TMCs) are anxious to use a diplomatic approach; however, some businesses can't understand why they should work without getting paid and make collection, by whatever means, a priority.
HOW THE DEBT ARISES
In the TMC sector there are a number of business models used in the corporate client relationship:
- transaction fees, billed monthly in arrears;
- flights and other bookings, plus commission booked monthly in arrears;
- flights and other bookings, plus commission booked monthly in arrears with a lodged card; and
- management fees charged monthly in arrears, plus a lodged card, or credit to the corporate to pay for flights and other consumables monthly in arrears.
With a lodged card solution, debts from a corporate should never really arise. However, where the TMC is financing travel bookings and expecting to collect monthly in arrears (plus commissions) then this is potentially a big headache.
For transaction fee arrangements, debts may have accumulated over several months where monthly payments have been missed.
It is important to address the outstanding sums as a matter of urgency. There should be an immediate meeting between senior management to discuss the failure to pay and how the outstanding sums are to be paid. Always consider escalating the meeting to a higher level of management if any promise is made and not delivered.
In the meantime, you should consider placing a cap on future bookings or even stopping these indefinitely until payment is made. If any agreement is made about paying off the debt, always put this in writing and confirm what sums are to be paid and when, and what will happen in the case of further default. This will provide a contractual remedy to recover the monies due if there is continuing default.
Finally, the TMC might consider changing its business model with the corporate. If all else fails, you should look at the termination provisions in your contract.
For those that believe services should be paid for, management may decide a heavier touch is required. Of course, there should be communication about the debt and requests for payment. If this does not get anywhere, then it's time to consult your lawyers.
Certainly with larger debts, speed is of the essence. A more gentle touch is a letter before action, threatening proceedings if payment is not made, or arrangements put into place, by a cut-off date.
This occasionally works, but some consider this merely gives a few extra weeks to the defaulting party to continue not paying.
The use of court services to recover debts is a cumbersome process that is also expensive and time-consuming. Once a legal claim has been drafted and served, the non-paying party is likely to have up to 28 days to file a defence before any judgement can be claimed. For a debtor continuing to default, it doesn't take much of a defence to persuade the court to list the case for trial in a few months' time.
The 'nuclear option' is the service of a statutory demand under the terms of the Insolvency Act 1986. This is a relatively simple form that sets out the details of the debt and is served personally at the debtor's registered office. If the debtor fails to make an immediate application to the court to set aside the demand or pay, within 21 days from service, the debtor will need to apply for an urgent injunction to avoid the creditor issuing a winding-up petition which is then advertised (so other creditors can attend the hearing), and all of the corporate debtors' bank accounts will be immediately frozen.
Once a winding-up petition is issued, it is endorsed with a hearing date in the Companies Court when, unless last minute arrangements are agreed, the company will be formally wound up. Sometimes, this 'bad cop' approach is the only way to get money out of the debtor and, in many instances, the debtor only pays the debt in full at the last possible moment before a winding-up petition might be issued.
Many in the TMC sector question the need for contracts, but bear in mind a typical contract will set out rights and obligations particularly relating to payments. There will be a right to terminate the contract and to recover monies outstanding with interest. A contract also puts the TMC in a better position if dealing with a liquidator or administrator of a failed company.
The contract should include a decent notice period when termination occurs for reasons other than non-payment, which can protect the TMC's staff if the corporate business migrates away. Each TMC can have a tailor-made contract to use as a template with its clients, to tighten up financial procedures and to hopefully have a longer and more successful business relationship with its clients.