How to Implement an Effective Debt Recovery Process

Customers failing to pay your business on time can severely impact your business’ cash flow. Additionally, recovering debts owed can be highly stressful, and prevention is always better than cure. Therefore, it is crucial that you put in place an effective debt recovery process. This article outlines the key steps you can take to implement an effective debt recovery process.

Why Should Businesses Have a Debt Recovery Process? 

There are several reasons why customers do not pay for goods and services on time. Some reasons may be entirely genuine, such as the customer’s financial problems. Nevertheless, having a debt recovery process in place to deal with these problems is vital. After all, if several customers fail to pay, your business could be in trouble.

There are several ways to recover debt. The methods involved can be informal, but there are also various legal options to help you recover debt. From the outset, every business should have a plan to tackle this common issue. Below are some key strategies you can include in your debt recovery process. 

1. Research Your Customers 

Before you work with new customers, it is worth carrying out due diligence on them. Research them to see how long they have been established. This will help you gauge whether they will be good customers who will pay your invoices.

2. Have Robust Terms and Conditions 

Precise and robust payment terms in your customer contracts are critical. Your terms should set out the:

• exact invoicing and payment dates, so customers are clear on when payments need to be made; and
• what happens if customers pay late. 

Additionally, you should ensure that you draw your customer’s attention to the terms, and the customer should sign a contract stating they agree to the terms.

As well as payment terms, your contract should:

• clearly state what products and services you will be delivering and when to avoid payment disputes later down the line; and
• ensure you invoice your customers on time and for the correct amount to make settling invoices easy for customers.

3. Communicate and Cooperate With Customers 

If customers fail to pay on time, you should have internal processes in place to collect the outstanding debts. Some essential tips include:

• having an internal credit control procedure that begins when invoices are overdue;
• creating a template debt chasing email setting out that payment is due and asking the customer to pay it;
• calling customers to ask them to settle their invoices, and keeping a record of the conversations you have.

If gentle chaser emails and calls do not work, you can then escalate matters by mentioning you are considering legal options.  

4. Know Your Legal Options 

If the informal options above do not work, you have various legal options to recover debt. You should consider the following legal options as part of your debt recovery process.

Alternative Dispute Resolution 

Before going to court, there are various other less formal avenues you can pursue to recover a debt. For example, your business can recover debt through mediation with your customer, where an independent third-party mediator will help to attempt to resolve the dispute. 

Issuing a Statutory Demand 

A statutory demand is a formal, written demand for the payment of debt to be made within 21 days. However, statutory demands are complex, and you should seek legal advice before issuing one.

Sending a Letter Before Action

A letter before action tells the customers you will be starting court proceedings to recover the debt if they do not settle the debt. This could worry the customer and lead to quick payment. 

Court Action 

Most debt disputes are resolved outside of court. If no other options work, you may wish to issue court proceedings to recover the debt. However, this can be:

• time-consuming;
• stressful; and 
• costly. 

There is also no guarantee that you will recover the debt. For example, the customer might not be able to pay. It is strongly recommended that you take legal advice on your options before commencing court proceedings. 

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Key Takeaways 

Debt recovery can be extremely difficult for businesses. However, there are various options available. Prevention is always better than cure, so you should put early processes in place to avoid slipping into debt recovery options. Ideally, it would be best if you resolved debt disputes informally with customers. In the worst case, court proceedings are an option. However, this comes with risk, and you should take legal advice on your options and whether it is worth going to court. 

If you need help with recovering debt, our experienced dispute lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.