Unpaid debts are a burden to any business: they affect cash-flow, they cause uncertainty and can even result in damage to your reputation when an unpaid invoice becomes unpaid staff.

If this sounds familiar, you aren’t alone: this year, research from Hitachi Capital UK found that late payments are costing SMEs an estimated £51.5bn. The survey of 1,000 SME owners found that almost a third of SMEs (31%) have experienced late payments costing their business at least £10,000 in the last 12 months.

After several rounds of polite emails and ignored phone-calls, it starts to become clear that the has no plans to pay the money they owe through a gentle reminder.

So, what can you do?

Good credit control helps to prevent debt becoming a serious problem for your business, but when a customer cannot or will not pay, the only way to recover the debt is through legal action. Before you do, it’s a good idea to consider the following and familiarise yourself with the process.

Is the debt worth chasing?

There are no rules regarding the amount of credit you are owed in order to justify debt recovery services, rather, it’s a question of judgement. If it’s a very small sum that the company can live with-out, you should weigh up the costs of proceeding with legal action against the amount you could potentially recover. If it is significant enough to affect cash flow, speaking to a solicitor as early as possible will help you determine the best route forward.

Who is your customer and why have they refused to pay?

The answer to these questions will influence how you approach the situation and how quickly you proceed to firm legal action. If it’s a one-off customer, you will have the freedom to be more assertive. If, on the other hand, it’s a recurring customer whose business you value and wish to keep on the books, being firm yet diplomatic will ensure you don’t alienate the client completely. Similarly, the reason for their late payment will determine the method you take in recovering the debt.

If the customer suffering cash flow difficulties, for example, negotiating a part-payment and rescheduling the remainder might be necessary. If there is a dispute over the goods or service provided, seeking legal advice for dispute resolution should be your first call. If your customer has no valid reason for failing to pay the money they owe, you should proceed to pursue the debt with the guidance of a legal professional.

What is the debt collection process for small businesses?

Business debt recovery begins by writing a formal letter before action to the debtor that requests payment by a certain date and warns of the legal action that will be taken if payment is not made by the date specified. You can also state that any proceedings which follow will also include a claim for Court fees and costs where applicable Having your lawyer send the letter on your behalf will reinforce the urgency to your client and signal to them that you have already engaged your lawyer on the matter. That said, the letter also provides them with an opportunity to meet that payment, and in most cases, is highly effective in recovering debt.

What if my debtor refuses to pay?

If your customer is still failing to cooperate after receiving a letter from your lawyer, it’s time to turn the heat up and take your efforts up a notch. At this stage, you should send a letter to the non-paying customer to inform them that you are pursuing legal action, giving them one final chance to make the payment. While most customers who can afford to pay will do so at this stage, there’s still a chance the debt will go unrecovered. If it does, your options will include pursuing County Court Proceedings, Controlled Goods Agreement, Charging Order

Statutory Demand or a Winding-up Petition.

The route you take will depend on your circumstances, and our specialist lawyers will advise you on the most effective course of action in recovering the money that is owed to you. For more information and advice on your situation, speak to a member of our team today on 0333 772 0826.

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