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independent schools and Bad Debt

Can’t get paid? An insider’s guide to avoiding bad debt

“A sale is a gift until the money is in the bank” – the first lesson in cash-flow control from my days as a trainee Chartered Accountant in 1989.
Fast forward 15 years and in August 2004 I become part-owner of a newly-formed commercial debt recovery company.

So what has changed in the ten years since we started the business? The economy has been through its’ worst recession in my lifetime and despite now being in recovery debtors are still using recessionary excuses.

So how does this affect independent schools?

School fees will usually be the last discretionary expenditure to be cut by a parent whose disposable income suffers a medium or long-term reduction. Whilst they could remove their children to the state sector, having valued the benefits of a private education sufficiently to secure it in the first place, the last thing they want to do is take their child out of school.

Equally whilst independent schools are businesses they also have a strong desire to educate and nurture the student and therefore often avoid enforcing the removal of a child even when the debt owed by their parent rises beyond what it is likely they can repay in the foreseeable future. Schools will naturally be reticent to exclude a child who is approaching an exam year despite non-payment.

These factors combined are what lead to independent schools frequently having book debts of high individual value from consumers who may be unable to repay them. The problem is exacerbated when parents have more than one child at the school and /or there are also charges for boarding as the debt rises more quickly.

When discussing this point with Heads or Bursars in the past, they have often told me that they believe it is often easier to collect a debt whilst the child remains in school, even if the full fees are not being paid, than once they have been removed from school. This may be a valid conclusion in some cases although I would argue that if the total debt continues to rise then such a choice will be counter-productive.

Why is late or non-payment becoming an increasing problem?

Giving credit to consumers gets more risky by the year partly due to increased regulation which whilst properly protecting consumers, does nothing to penalise those consumers who deliberately take services they know they cannot pay for.

It is this writer’s opinion that the nature of society has changed in that everyone now knows their rights but many choose to be ignorant of their obligations.

Recovering consumer debts via the courts can be difficult as consumers tend to receive a sympathetic hearing when they raise a dispute even where no supporting evidence is produced. There is no equivalent to the late payment legislation which exists for business to business debts and so trying to recover collection costs is even more difficult. This can be done when the contract clearly covers such an eventuality but again a straight refusal to pay the costs means a court claim would be needed.

Changes in personal insolvency laws have also made life easier for consumer debtors and more difficult for those businesses owed money by them. So has the reduced negative perception of personal insolvency and the plethora of debt management companies effectively “selling” IVA’s as a means of walking away from personal debt. The introduction of the Debt Relief Order means that for a £90 fee, qualifying debtors can write off up to £15,000 of debts as long as they have under £300 in assets. How does the Official Receiver check these criteria are met before issuing a DRO? Who knows? Fortunately for the independent schools sector at least, DRO’s are unlikely to be relevant due to the low asset threshold.

So how do schools avoid bad debts?

It may sound glib, but the first answer and the most obvious is the simplest – stop giving credit. My company has numerous clients in various sectors who have gone down this route, at least partially, without any significant loss of business. For schools there are schemes which provide loans to parents and pay the fees to the schools. If the parent doesn’t repay the loan then the debt issue is for the loan company and not the school.

If ceasing offering credit altogether is impossible then consider asking for guarantors. If you accept a guarantor, have you credit-checked them? Can they afford to pay you if the parent does not? Requiring a guarantor can be a valid part of a payment plan once a debt has arisen and the parent wishes the child to retain their place at school.

Take action to address overdue fees at an early stage and do not allow the debts to grow term by term. A strong school policy in this regard which is operated dispassionately and fairly to all will minimise both the school’s exposure to bad debt and any accusation of favourable treatment to one parent over another.

Get your response ready in advance

Once you have an overdue account then the problems start. Have your plans in place for what you are going to do when this happens, rather than looking at your options only when the need arises.

Once the fees fall overdue a strong policy will deal with separating the “can’t pays” from the “won’t pays”. Ensure that you follow up overdue fees promptly and regularly, by letter, email and phone.

Have your escalation ready. If you want to issue Court proceedings or a statutory demand under the Insolvency Act then ensure that your final letter states precisely that this will happen on a set date if you have not received payment. Be unambiguous. Ensure that you have staff capable of dealing with the Court processes, paperwork and attending hearings or, if you really don’t mind incurring substantial costs, have your legal representatives in place.

If your preferred option is to refer the matter to your chosen debt recovery company then name them in the letter, the date on which you will pass the debt over to them and that the customer would then be liable for your costs incurred in recovering the debt.

What this approach does is give those who can pay but won’t a reason to pay you now, instead of some other creditor. Their self-interest will tell them that this particular debt is now about to start costing them extra.

If they still don’t pay then this is where you must be strong. Whatever action you said you would take in your last letter must be taken promptly. If you don’t follow through then they will not pay you as they know that you do not follow up on your promised actions.

How to choose a debt recovery provider?

The actions of your chosen provider will reflect on you and it is important to consider this alongside your assessment of which company is likely to recover the most debt and cost considerations.

Ensure that you only consider providers who are authorised to collect consumer debt by the statutory regulator the Financial Conduct Authority. At present, they should hold Interim Permission and this can be checked online on the FCA website. The application process for full registration with the FCA will be ongoing over the next year for most firms.

Check references, particularly those from other schools. References which do not show the full name of the person credited as giving the reference or their company or school may be discounted as these cannot be verified.

Call the provider and ask to speak to a Director. The better ones will be happy to discuss your requirements in person and you will be able to form an opinion as to their personality, which usually comes through in the actions of the collections staff, having spoken with a principal.
If you have access to a credit-checking facility, use it. If not, Companies House Webcheck will give you basic details of how long the company has been trading and whether it has filed up to date accounts and annual returns.

Most Bursars will know their equivalents in other schools and so recommendations should be possible.

Summary

• Do you really need to give credit? If no, don’t.
• Take a guarantor, ensuring they are capable of paying the debt if required to – check whether they are a home-owner, consider a voluntary personal credit-check and/or land registry search.
• Chase overdue fees promptly and regularly by letter, email and phone.
• Your final communication before either issuing a Court claim or referral to a collections agency should be in writing and must state the action you will take and cost consequences for the debtor if they do not pay by a date you now specify.
• On the date specified by you, take the action without delay.

Steve Fraser ACA
Director
Sinclair Goldberg Price Limited, commercial debt recovery specialist
August 2014