Credit Matters Blog

Legal Action - Just a Debt Collection Tool or Something More?

Kim Radok 01 May 2012


Most business people loath legal action at the best of the times. The reasons for this loathing include the financial cost, time involved, and the lack of certainty that even if you win the case, you will actually get paid.

However, I believe there are bigger issues at stake other than the short-term issue of the upfront costs. Amongst the issues at stake are the pride and self-esteem within the trading organisation, the use of legal action as an advertising tool to confirm you will stick up for your rights, and of course, the chance to get back some of the money.

Another benefit of legal action is that you are letting the rest of the business community know, the party you sued, may not pay them either. One of the core attributes of any trading entity today is their financial integrity. Without an unblemished history, there is little chance of obtaining finance at the best rate and sometimes not at all. In fact, it is this very reason why legal action can be even more effective in these economic times.

Now I will hear the naysayers, the naive and those with vested interests put forward the proposition, legal action is too costly. Their reasons are valid to a point as legal action is not cheap and does not always guarantee payment. I can also understand why it is not your company's role to be the white knight of the business society.

The reality of the business world, which you joined freely, is that legal action is a part of the commercial world you chose to enter. You do not have to like it, but you do need to understand and use legal action when appropriate if you are to operate a successful business.

There are three strong and very positive arguments against those who only articulate negative sentiments against legal action.

The first argument is in the theme of "... bad things happen because good men do nothing." In any society, the business society in this case, all businesses interact together in some fashion - even competitors. When a business does not take legal action, where appropriate,  you are doing your business a disservice. Furthermore by not taking legal action and naming the payment manipulators and fraudsters, you allow them to continue and survive in your business community.

Make no mistake, the decision not to take legal action will come back to haunt your business later. Inevitably at some stage in the future, these payment manipulators and fraudsters will take advantage of your customers.  When this happens,  you may find you are dealing with cash-poor customers.

The second reason why legal action is important, is what happens when it is taken by your competitors and customers. Through their actions, hopefully you will have an early warning of those business people who do not pay. Therefore when they approach your business you can initiate strategies to sell without necessarily using credit.

Finally, whilst you are making business difficult and more expensive for the payment manipulators and fraudsters, you are also supporting your good customers who do pay. Again, you want good paying customers not slow paying customers or non-payers.

I am not so naive to think legal action is THE SOLUTION and the best way of ridding the business community of the payment manipulators and fraudsters. However, it is one way as responsible  business community participants (not white knight do-gooders), that you can do better business.  

Therefore, when you are next forced to consider legal action, think through all the issues, not just the upfront costs. Each case for legal action should be determined on the merits of the case and the positive benefits which may make the legal action a value-adding proposition and merely a cost.

If all 'good men' acted more responsibly and took legal action when appropriate, less non-payers and fraudsters would survive in business. In turn this would lead to better business, more sales that get paid and greater profits for your business.

May you be paid today rather than tomorrow.

Kim Radok