In a recent blog titled “Show me the money” I discussed the six steps you should take at the start of a working relationship with your customer, to better ensure you get paid promptly for the goods or services you provide. By applying these steps consistently and diligently you will certainly minimise your bad debt problems.

However, the reality is that there will always be some customers who do not pay on time (or, worst case, at all). So, the question then becomes, what do you do next?

There is a lot you can do yourself before calling in hired (legal) muscle. Here are four action steps you can take when pursuing outstanding payments:

Communication is key

It’s important that you talk to the customer. Is there a problem either with you or with them that they haven’t told you about? Are they unhappy with the product or service in some way? Perhaps there is something you can do to make the problem go away and encourage payment.

Are they having temporary cash flow issues?

Most SME businesses experience temporary cash flow blips at one time or another. If this is the case, see if you can put a payment program in place to enable them to pay in instalments over an extended period.

Providing support for a good customer in their time of need can pay handsomely over the long-term for your business. However, if the payment program gets complex, you may have to get legal help to document the arrangement. If this is the case, the customer cannot object to bearing the cost.

Regular notifications are essential

Make sure to send regular account statements, and if possible ensure they are copied to more than one person in the customer’s organisation – particularly the person responsible for account payments.

Its time to take interest

If you took my advice and made it clear in your terms and conditions that overdue payments bear interest, now is the time to impose that interest and show it accumulating in the account statements.

Applying interest charges can be very effective in flushing out the characters that routinely stretch their creditors to 60, 90, 120 days, on the basis that it is better to fund themselves with free money from you than expensive money from the bank! For this to work, of course, you have to set your interest rate high enough to bite.

What happens if the customer still hasn’t paid you?

If you have taken all these steps and still haven’t been paid, sterner measures will be required. You have now reached the stage where you should at least discuss it with a lawyer (if you haven’t already done so) and the following can happen:

  • A letter from your lawyer
    A “lawyer’s letter” to the debtor customer, explicitly threatening legal action, is a good start. Sometimes that’s all it takes to achieve payment, and even if it doesn’t, it provides a basis for claiming maximum costs later on.
  • Court action
    If the amount remains outstanding after the “lawyer’s letter”, you are looking at starting court action to recover the debt in some form. If your claim is absolutely cut-and-dried your debtor may not bother to put on a defence, so you can get a default judgement quickly and relatively cheaply. Unfortunately, most court matters take a long time and cost substantial amounts of money to run – litigation is not for the faint-hearted!
  • Wind it up
    If the debtor customer is a company, and there is no “genuine dispute” regarding the debt, there may be an option to issue a “statutory demand” to wind up the company. Faced with the prospect of winding up, most debtors will pay the debt if they can.
    However, there are pitfalls to this strategy. If the debtor has any grounds for saying there is a “genuine dispute” it can apply to the court to have the statutory demand set aside. If there is even the sniff of a dispute the court will set aside the statutory demand, and probably make a substantial costs award against you, the creditor, for misusing the winding up process. So, the threat of winding up can be a very effective weapon, but one to be used with extreme care.

Whilst there are numerous ways you can pursue outstanding debts, ultimately at every stage of the process you must make the hard-headed decision about whether it’s worth spending any more money to chase the debt.

In the heat of your indignation you may say “whatever it takes”, but months later, many thousands of dollars spent on legal costs, and you still haven’t even got to court, you will feel different. Factors to consider when deciding whether the effort is worth the reward include the amount of the debt, whether the debtor has any grounds for defending or raising counter-claims, and, most importantly, can the debtor pay? The biggest court judgment in your favour is worthless if you can’t collect the money.

If you would like to know more or need any assistance, feel free to contact us at Antcliffe Scott, we’d be more than happy to help!

Antcliffe:Scott Lawyers