Wouldn't all companies love it if their customers paid invoices on time? There would be no need to ever chase debts and worries about cash flow would be a thing of the past. However in all likelihood we'll never reach this debt free utopia.
Businesses can invoice clients early, wait patiently for payment, send chase emails and hope that payment will someday finally arrive.
But sometimes those polite little reminders, copy invoices and monthly statements are just not enough to deal with those customers who are adamant they are not paying.
So what can you do to ensure your business is paid the money it is owed?
Choosing how and when you need to take formal action can be difficult and there are a few informal options at your disposal before starting legal action. After all, the last thing you want to do is spend time and money going to court for every invoice that is overdue by a few days.
But when you've exhausted the chasing letters and phone calls, we wanted to share our experiences and tips on how to collect debt from a customer, starting with establishing your legal position on the debt.
Evidence needed to prove a debt recovery claim.
While the vast majority of business debts won't require court action, it is important to establish your legal position and understand how to collect a debt legally.
In order to take a debt claim to court, you need to have some kind of evidence that the debt amount you wish to claim is due. In most cases your invoice and a letter before action will suffice, however generally your evidence should include:
Without the above evidence, your legal position may be considered weak regardless of how you intend to pursue the debt.
If the customer disputes the money is owed, for example because they believe the goods were faulty, you may need to take steps to investigate and resolve the business dispute before proceeding with debt action.
Should you get an agency or solicitor to collect a debt, or do it yourself?
Informal actions such as sending overdue notices, emailing the debtor's accounts team and speaking directly about payment should all be attempted before you begin seeking assistance with recovering the debt.
But once you do decide to go down a more formal route to secure a payment you have a few options:
Option 1 - Submit a debt claim yourself
To make a court claim on your own you can use the HMCTS Money Claim Online service. It offers a process to recover the money your business is owed by walking you through the submission of an online claim and paying a court fee.
You need to be aware that these are court proceedings and so you should familiarise yourself with the 'pre action' rules along with what happens should you win your claim and receive a judgment. Ensure you read the associated Money Claim Online User Guide thoroughly before starting the claim process.
Option 2 - Hire a debt collector
When you hire a debt collection agency they will start chasing the debt and in some scenarios begin the legal process to recover it through the courts. You should bear in mind that debt collection agencies don't have any special legal powers beyond what you can do yourself. Generally a debt collection agent will also take a proportion of any debt that they are successful in collecting to cover their fees.
Option 3 - Instruct Debt Recovery Solicitors
A Solicitor should provide some general advice on the process and your prospects along with a fixed fee of what they will charge. If their fees are more than the money you are seeking from your customer, then you'll be better going with another route. However experienced debt recovery solicitors should have a fee structure which complements the amount you are wishing to recover and the complexity of the issue (i.e. it will be more complicated if the debtor defends the claim or disputes the debt being owed).
In the majority of debt recovery claims, the initial solicitor's 'Letter Before Action' often does the trick and the customer will opt to pay their bill rather than face court proceedings from a law firm.
If court action is needed a solicitor can explain the risks and advise on items such as recovering court fees and any statutory late payment charge that can be made. For example, interest may be able to claimed on top of the debt (usually 8% above base rate) via the Late Payment of Commercial Debts Act.
You may feel bad 'hounding' a customer about paying their debt or even getting a solicitor involved, but you shouldn't. You did your job and it is not your fault they have failed to pay you in a timely manner.
Being understanding to your customers while knowing your legal rights is what all responsible businesses should aim for.