Trading with sole traders? Debt recovery changes could affect your cash flow

by Boyes Turner

New rules governing debt recovery are set to significantly change the processes and timescales involved in offering credit to sole traders.

The Pre-Action Protocol for Debt Claims, which will come into effect from 1 October 2017, essentially aims at the protection of consumers. But in a departure from previous regimes, it will also treat sole traders as individuals rather than a business.

As a result, onerous new demands are to be placed on creditors that will likely lengthen the time taken for debt recovery from sole traders to months rather than weeks.

For instance, under the current rules, creditors only need provide details of the amount owing and give seven days to pay, as well as offer details of organisations which offer debt advice (a requirement that continues under the protocol). The new rules extend the time it takes to issue court proceedings by at least five weeks.

The new rules also set out a list of information to be provided by the creditor by way of a letter of claim before the issue of any proceedings can even be contemplated. The letter must give the debtor 30 days to pay the debt.

The creditor must also include copies of all relevant documentation and if the debt has not arisen subject to the terms of a written agreement, provide sufficient information about how the debt has arisen for the debtor to identify the same. How the matter will then progress will depend upon what response, if any, is received from the debtor.

While the intent behind giving sole traders the same protection as that afforded to individuals is laudable, the impact on other small businesses might be to reverse progress made by successive governments on reducing late payment of business debts. If the consequence is that offering credit to sole traders become less attractive, everyone could be a loser.

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