Recovering What You’re Owed: Essential Debt Collection Strategies
Imagine this: you’ve delivered a stellar service or product, sent your invoice, and waited patiently. But as days turn into weeks, the payment you were promised remains unpaid.
Whether it’s a business client or a personal acquaintance, chasing unpaid debts can feel like a daunting, uphill battle. So, how do you successfully recover what you’re owed while maintaining your peace of mind? Let’s dive into some strategies.
1. Preparation is key
Successful debt collection starts well before you issue your first invoice. You should allow the “dodgy” debtor as little wriggle room as possible by making sure that your contract documents have clear payment milestones, with responsibilities spelt out. State clearly who you are contracting with – is it a company, its director or a sole trader? Bad payers will often try to frustrate their suppliers by using numerous identities, including subtly different company names, or be vague about who is ultimately paying your bills.
Well-drafted standard terms and conditions will also help. For instance, most people don’t know that you’re not generally entitled to walk off the job immediately when any invoice is overdue. Terms and conditions can ensure that you’re entitled to do so, and prevent further bills being run up.
Proper credit control is related to these issues and if anything is even more important. Once you have established who you are dealing with, do some due diligence. If it’s a company, obtain an ASIC search to check whether they exist, when they were set up and who its directors are. If you can, use an online credit reference agency. If they’ve only been trading a short time, that’s a potential red flag. Regardless of their age, decide in advance how much credit you are prepared to advance and note it down. Never, ever grant substantial credit just because the director appears to drive a flashy car (we have actually seen this happen)!
Have a proper credit application form which the customer’s director needs to sign, and which incorporates a personal guarantee of the company’s debts by that person. As with terms and conditions, we can help you prepare effective credit control documents.
Only send out contract documents and invoices in the exact name of the customer you’ve credit checked and approved. This helps avoid any confusion about who is liable. Stage payment terms in a way that links with your approved credit amount, so that it doesn’t get out of balance. And consider getting the debtor to pay you in advance if necessary, particularly when you are going to be incurring out-of-pocket expenses on their behalf.
2. My bill is unpaid – what can I do by myself?
Good credit control procedures are still your best friend, and can be actioned by anyone at any time, regardless of whether the previous suggestions have been followed. Make sure payment due dates are diarised. Send a polite chaser as soon as possible after the debt initially becomes due and repeat at least weekly. If a debtor is in financial difficulties, it is generally the creditors who are hassling them the most often who will get any cash that is available.
A word of warning about emails: everyone is prone to occasionally saying things in emails that they would never say to someone else’s face. Ranting at, or insulting, debtors may put you to the back of the queue. Even if the debtor doesn’t do that consciously, they could simply decide that they can’t face receiving nasty communications and start blocking them. Worse still, on the occasions that the debtor is not paying because there is a genuine dispute, aggressive messages are likely to inflame things and make resolution a lot harder, and potentially more expensive. Polite but persistent is generally the best strategy.
3. When should I involve lawyers, and what can they do?
The right time to involve a lawyer in the collection process will depend on the individual business and the nature of the unpaid bills. As a rule of thumb, if the bill is three weeks past the due date and your regular chasing is getting nowhere, you may want to step things up by taking legal advice.
Put bluntly, the lawyer’s role is to escalate matters by threatening the debtor and, if that is unsuccessful, by issuing Court proceedings. Usually, a lawyer will give them at least seven days’ notice to pay up or face Court action in which the Court will be asked to give a judgment against the debtor (and any guarantors) for the amount owed, plus interest and legal costs. The judgment will damage their credit rating and can be a powerful incentive for them to pay up; if not then there are enforcement procedures that can be followed to try and force payment.
If Court proceedings are issued and the debtor does not defend them, a judgment will be available at a minimum of between six to eight weeks after first involving the lawyer.
Alternatively, if the debtor is a company, the lawyer may issue a demand that the debt be paid within 21 days or face a winding up petition. This is only available if the debt is more than $4,000.00 and although it is very threatening to most businesses, some caution needs to be adopted with this approach as the winding up process can be expensive.
One thing that lawyers cannot do is get blood out of a stone. If the debtor has no assets, suing them and getting a judgment, or winding them up, won’t magically make money appear. This highlights the importance of proper credit checking, credit terms and obtaining personal guarantees from company directors before you start working with a client. The debtor might not have any assets, but their director may well do, and only with a signed guarantee can you get access to them.
At Conlan Cummings Lawyers, we can help you with all stages of this process, from preparing effective contract documents, assisting with your credit application forms and drafting personal guarantees by directors, through to advising you on any disputes that may arise and (if necessary) threatening and suing the debtor.
Please contact us if you would like to find more about how we can assist your business recover what it is owed.