Debt recovery

If you find you have a creditor who hasn't paid outstanding invoices then you may be left with no choice but to recover the debt. But how should you go about it? Trying to resolve the conflict amicably is always advisable before resorting to debt collection agencies and the courts.

According to one law expert, successful recovery for significant debts requires planned action. This may range from seeking immediate insolvency proceedings, to traditional 'Letter Before Action' processes and court proceedings.

There are many law firms and debt recovery specialists that offer pre-litigation services, writing letters and making telephone calls first, to increase the prospects of debt recovery.

Art of diplomacy

But fortunately, before you get to that stage, there are a number of diplomatic measures you can take.

Communicating well with your debtor is the first thing you should do. Trying to resolve the conflict amicably is always advisable, because there may well be a solid business reason for the late payment.

If you can come to an agreement with them to accept part payment and also agree a deadline for the rest, you can continue to have a healthy business relationship with them. They may well have valid reasons why there are unable to pay their debt to you immediately, but that will not stem their cash flow in the long term.

10 top tips

Here are ten top tips for good debt collection. Stick to these and you should be fine.

First write to the debtor, setting out the facts of the situation. Be polite.
Include who's involved, the name and address of both you and your debtor.
Include dated copies of all paperwork relating to the debt.
Specify a date by which you expect payment.
Request that the debtor puts in writing any issue or dispute they have with your statement.
Details the steps you'll take if payment isn't received.
Stay firm, but calm in all your dealings with the other party.
Stay within the law.
Send all correspondence by recorded delivery.
Keep copies of all documents relating to the debt, in case they are needed for legal purposes.

Off to a good start

It is far better to foster good business relationships where you do get paid on time to avoid these situations arising.

Ensuring that your customers pay their bills on time can be difficult, because many businesses rely closely on their cash flow, which might depend on sales coming in. But on the other hand, their cash flow problem can become your cash flow problem, and could even force you out of business.

One thing you can try is to request the customer pay in full, in advance of receiving the product or service. If this is not possible, you could request a deposit.

Offering incentives

If you are faced with a customer who will only deal with you by paying invoices in arrears, you could offer them discounts for early payments, and even charge debtors interest on late payments.

You do have a statutory right under the Late Payment of Commercial Debts (Interest) Act 1998, to charge debtors interest on late payment if you want to, and you can also claim reasonable debt-recovery costs.

But if you are taking this approach, make sure you set out clear terms and conditions and use a statement for trading, rather than sting them with the charges out of the blue.

It's good practise to make your customers aware of your terms and conditions before providing them with goods or services. If you can, ask them to accept your terms and conditions in writing.

You should also sort out any problems they have before you supply goods or services or raise an invoice, and include your terms and conditions on each invoice that you raise.

If you do find yourself in a situation where you need to recover a debt, Direct Line for Business policyholders have access to 24-hour Free legal advice helplines.

Related information:

Business expenses - guidance on what you can and can't claim back in business expenses.

Keeping accounts - how to set up accounts for a new business and keep them in order.

What you need to know about tax - how to complete your self-assessment form.