Don't get left high and dry

Cashflow is king — more business fail because of poor cashflow than for any other reason. Make sure you have tight procedures in place for getting paid

Cashflow — or lack of it — is a perennial concern for recruitment agencies, even when the economy is buoyant. If there is a downturn it can put some agencies, even the bigger ones, at serious risk of going under.

Those bigger players will undoubtedly be aware of the legal options open to them when it comes to getting the money they are owed, but what of the smaller ones, who might be wary of embarking on the legal route to debt recovery, or simply unaware that this is an option available to them?

Good news — there are things you can do to get the money you are owed. One action, which in our experience prompts around 70% of recipients to pay our recruitment agency clients, is to issue a letter before action (LBA). At the very worst, LBAs draw out queries, enabling agencies to deal with those debtors previously ignoring them.

But before drafting an LBA, agencies should ensure they follow a precise credit control process, starting with a correctly raised invoice. Having allowed a maximum of 75 days for it to be paid, a decision should be made about whether to send an LBA to the third party, demanding payment within seven days. During those 75 days, a strict process of letters and calls should be made to the debtor.

An LBA does not have to be written by a solicitor, but those that are carry more weight, and a properly compiled LBA that follows certain protocols will be considered favourably should a claim go to county court.

If no payment is forthcoming after seven days, or if the third party fails to raise any queries, the recruitment agency can issue court proceedings via the county court to demand payment, and might at this point engage a solicitor. A solicitor is entitled to claim back costs from the third party, which can pay or offset your own fees.

Court fees are proportionate to the amount being claimed, and interest can be claimed at this stage. Interest by default can be calculated at 8% per annum or, under the Late Payments Act 1998, can be 8% above base rate. If your terms and conditions allow, you can claim contractual interest. These are all recoverable from the third party, which has now become a defendant.

The defendant now has three options:

• pay the debt, court fee, solicitors' costs and the interest
• defend the action (in full or part)
• ignore the action, and as a consequence of losing have a county court judgment (CCJ) against it.

It rarely reaches this stage, with an LBA usually being sufficient to bring in monies due. In 15% of cases, third parties settle once court proceedings are issued, not wanting to risk a CCJ, negative publicity or money spent on costs. The remainder are contested and go all the way to judgment.

There are certain measures recruitment agencies can take, however, which might prevent them ever having to get to the LBA stage.

First, check your clients are creditworthy; then ensure that your terms and conditions (T&Cs) are incorporated into any agreement with the client.

T&Cs should accompany all CVs that are sent out, so they become pre-contractual. They do not have to be signed to be part of a contract, though: if an interview proceeds, T&Cs are deemed to have been incorporated if your wording is right.

Finally, third parties could be given a credit account facility, whereby they sign up to your terms before the account is opened.

Those recruitment agencies filling high volumes of temporary positions are the most exposed when it comes to cashflow, being responsible for paying temps weekly or monthly irrespective of whether they themselves have been paid.


Richard Gwynne is director of the debt recovery unit at national law firm Shoosmiths

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