Five debt recovery solutions for small businesses

Sending invoices as a small business can feel like you’re dropping them into a void, while watching your savings diminish as you wait to be paid. According to a report by credit specialists Dun & Bradstreet, the average late payment time for businesses in Q1 2017 was 15.3 days late, and even higher for payments by big businesses to small businesses, 18.3 days late.

If you are owed money, here are five steps to get back in the black.

Take preventative measures

  • It’s always a good idea to include provisions in your terms of business that set out what will happen if invoiced amounts aren’t paid on time. For instance, you can include terms that:
  • set time limits for payment of invoices
  • provide that interest will become payable at, say, 10 per cent per annum, in the event of late payment
  • require the customer to pay your legal fees if you have to take action to recover unpaid amounts.

These types of clauses can come in very handy if you need to chase a debt.

Be organised

It can be easy to lose track of what you’re owed. Take advantage of online tools to set reminders for when invoices are sent out and are due, and create a filing system for relevant correspondence. Documenting everything is essential in case you need to commence legal action.

Contact the debtor asap

Don’t delay in contacting the other party once your invoices are overdue. If you call them, make sure you always follow up in writing, setting out new deadlines for payment and anything else discussed or agreed to. Remember that invoices are often not paid on time because of oversight, not because of any ill intent – so ensure this communication is friendly, but clear.

Send a letter of demand

If your invoice remains unpaid, the next step is to send a letter of demand, where you can set a deadline for payment (7-14 days is good) and state that if it’s not paid on time you will commence legal proceedings to recover the money, and seek payment of interest and legal costs. If you want a letter of demand to pack more punch, you can ask a lawyer to send it for you.

Commencing proceedings…after careful consideration

If you’re in NSW and your debt is $10,000 or less you can bring a claim in the Small Claims Division of the NSW Local Court (there are similar courts and tribunals in other states). The Small Claims Division is informal and designed so that people can bring a claim themselves without legal representation – which is great for SMEs.

If your claim is more than $10,000 (in NSW), it’s best to get a lawyer to help you.

Things to consider before commencing proceedings:

  • Can you find the other party? To start legal proceedings, you must be able to find the debtor to serve the documents.
  • How strong is your case? Do you have documents (contracts, emails, receipts) or witnesses that support what you say happened?
  • How likely is it that you will recover the debt? Is there any risk the person you’re trying to collect money from is bankrupt or will be unable to pay you the money, even if you get judgment?
  • Can you afford the time away from your business? Going to court and preparing your case will take time – consider if your business can handle this or if you have enough funds to afford a lawyer.
  • Can you afford the associated legal and court costs? There will be a court filing fee and legal fees if you get a lawyer involved.

Sean Melbourne and Christina Guo, Source Legal

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