Summary
- Carry out due diligence on customers and set clear payment terms with interest clauses to reduce the risk of non-payment.
- Use internal credit control and informal communication to recover most debts before escalating.
- Where informal steps fail, statutory demands, letters before action and court proceedings are available, but seek advice first.
- This guide explains the debt recovery process for businesses in the UK.
- LegalVision’s business lawyers specialise in advising clients on debt recovery and disputes.
Tips for Businesses
Include clear payment dates and interest clauses in every contract. Invoice promptly and keep signed contracts and invoices as evidence. Start chasing the day payment is overdue. Calculate statutory interest early, record all contact, and escalate to a letter before action if reminders fail.
A debt recovery process is the set of steps a business takes to collect money owed when a customer fails to pay an invoice. In the UK, the Late Payment of Commercial Debts (Interest) Act 1998 lets businesses charge statutory interest at 8% above the Bank of England base rate, plus fixed compensation, on overdue commercial invoices. The Limitation Act 1980 gives you six years to recover a debt through the courts. The government confirmed major late payment reforms in March 2026, including a 60-day cap on payment terms and mandatory statutory interest in commercial contracts. A strong process moves from prevention, to informal chasing, to formal legal action. 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.
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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.
Your Statutory Right to Interest and Compensation
When a business pays a commercial invoice late, you have a statutory right to charge interest and compensation. This right comes from the Late Payment of Commercial Debts (Interest) Act 1998. It applies automatically to business-to-business contracts, even if your contract says nothing about interest.
Statutory interest is set at 8% above the Bank of England base rate. Interest starts to accrue the day after payment was due. If you did not agree a payment date, the debt is treated as late 30 days after the customer receives the invoice or you deliver the goods or service, whichever is later.
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.
This fact sheet outlines how your business can manage a dispute.
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.
Frequently Asked Questions
When can I issue a statutory demand against a business that owes me money?
You can issue a statutory demand once a company owes at least £750, or £5,000 for an individual. The debtor then has 21 days to pay before you can start winding-up or bankruptcy proceedings. Statutory demands are complex, so seek legal advice first.
What happens after I send a winding-up petition?
A creditor can present a winding-up petition where a company owes more than £750 and has not paid for over 21 days. The court can order compulsory liquidation, where a liquidator collects and distributes the company’s assets to creditors.
What should my customer do if they receive a debt collection letter from us?
They should respond quickly, usually within two weeks. Ignoring it risks escalation to statutory demands, court action or winding-up proceedings. A debt collector has no special legal powers, though they can pursue court action if the debt stays unpaid.
How long do I have to recover a debt through the courts?
You have six years from the payment due date to pursue most commercial debts through the courts. After this, the debt becomes statute-barred and is unenforceable. The period resets if the debtor acknowledges the debt in writing or makes a part payment.
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