Late payment is a common commercial risk, but allowing unpaid accounts to accumulate can quickly turn a manageable credit-control issue into a more significant problem.

Many businesses are understandably reluctant to pursue customers too firmly. Relationships matter, particularly in industries where repeat business and reputation are important. A customer may also have a legitimate short-term cashflow problem.

There is, however, an important distinction between allowing reasonable commercial flexibility and letting an account remain unpaid indefinitely.

Effective debt recovery usually begins well before court proceedings are considered.

Establish what is actually owed

The first step is to make sure the business can clearly establish the debt. That means locating the relevant contract, quotation or proposal, terms of trade, invoices and evidence that the goods or services were supplied.

Any correspondence with the customer should also be reviewed, particularly if concerns have previously been raised about the work, price or invoice.

This helps distinguish between a debt that is simply unpaid and one that is genuinely disputed.

The recovery strategy may be quite different in each case.

Early intervention is usually preferable

Businesses often leave overdue accounts untouched for too long because they are concerned that pursuing payment may damage the customer relationship. A measured credit-control process should not have that effect.

An initial reminder can simply identify the outstanding invoice, the amount due and the date by which payment is now expected. If the customer is experiencing a genuine cashflow issue, this may also be an opportunity to discuss a payment arrangement.

What is generally unhelpful is allowing repeated promises of payment to pass without any structure.

As an account ages, the commercial risk increases. The debtor’s financial position may deteriorate, other creditors may take recovery action, employees with knowledge of the transaction may leave and relevant records can become more difficult to locate.

There is rarely an advantage in discovering six months later that the customer who promised payment “next week” has ceased trading.

Payment arrangements should be documented

An instalment arrangement can be a sensible commercial solution where the debtor accepts that the money is owing but cannot pay immediately.

The arrangement should still be recorded in writing. It should specify the amount and frequency of payments, the date payments will begin and what will happen if an instalment is missed.

The purpose is not simply legal protection. Clear terms reduce the scope for further misunderstanding and give both parties a defined path towards repayment.

When a formal demand is appropriate

If ordinary follow-up has failed, a formal demand may be the next step.

A well-prepared demand should clearly identify the basis of the debt, the amount outstanding, the date by which payment is required and the action that may follow if the matter is not resolved.

Where default interest or recovery costs are claimed, the contractual basis for those amounts should also be considered.

The purpose of a demand is not to produce the most threatening letter possible. Its value lies in showing that the creditor has identified its legal position and is prepared to act on it.

In many cases, that is enough to prompt payment or meaningful engagement.

Interest and recovery costs

Businesses sometimes assume they can add interest, collection fees or legal costs to any overdue account.

Whether those amounts can be recovered will depend substantially on the parties’ agreement or the business’s terms of trade as agreed when the goods or services were supplied.

If no such agreement or terms were in place at the time of supply, or if they did not include adequate default provisions allowing recovery of costs or interest, those provisions cannot simply be imposed on the debtor later.

Good debt recovery begins with good credit control

The most effective debt-recovery strategy is often preventative.

Terms of trade should address payment dates, interest, recovery costs, credit limits, guarantees and security where relevant. Businesses should also have a consistent process for identifying and escalating overdue accounts.

That process does not need to be inflexible. A longstanding customer experiencing a temporary difficulty may warrant some leniency. The important point is that any decision to extend time should be deliberate, rather than the result of an invoice simply being overlooked.

Legal advice can be particularly valuable where the debt is significant, the debtor has stopped communicating, liability is disputed, there are concerns about solvency, security or guarantees are involved, or formal proceedings are being considered.

At that stage, the question is no longer simply how firmly to word the next reminder. It is which recovery option best protects the commercial position.

Need advice on an unpaid business debt?

Blackhawk Law advises businesses on debt recovery, unpaid invoices, terms of trade, guarantees and commercial disputes, as well as helping clients put stronger credit arrangements in place before problems arise.

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This article provides general information only and does not constitute legal advice. The appropriate recovery process will depend on the circumstances of the particular debt and the contractual arrangements between the parties.