Table of Contents
In Short
- Act quickly when a client fails to pay, as delays can complicate debt recovery.
- Send a clear letter before action, outlining the debt and potential legal steps.
- Consider mediation or legal proceedings to resolve the matter efficiently.
Tips for Businesses
If a client doesn’t pay on time, act promptly to recover the debt. Sending a formal letter before action can often resolve the issue without further steps. If necessary, consider mediation to avoid expensive litigation, but be prepared to take legal action if needed.
Many small businesses experience late payments and unpaid invoices. Any non-payment can significantly impact cash flow and a business’s ability to cover expenses, pay employees, and meet its financial obligations. This article will explain how small business owners can recover a debt.
Late Payment vs Missed Payment
Both late and missed payments are forms of debt. However, a small business owner’s strategy to deal with a late payment will likely differ from that they would take for a completely missed payment.
The following table outlines the difference between late and missed payments.
Type of Debt | Explanation |
Late payment | A debtor (the person or entity that owes the money) fails to make a payment by the agreed-upon date but eventually pays after the due date has passed. Late payments can happen for various reasons, such as administrative delays, cash flow issues, or oversight. |
Missed payment | Missed payments refer to situations in which the debtor fails to make a payment altogether and does not rectify the problem within a reasonable timeframe. |
A situation that initially appears to be a late payment can stray into a completely missed payment.
For example, suppose you provide services to another business. Unfortunately, they fail to pay by the due date set in your invoice despite you sending a polite payment reminder a few days before. You communicated the late payment promptly to the other business owner, and they apologised, attributing the delay to recent financial strain. They agree to pay the invoice plus late fees within two weeks. However, two weeks pass, and you cannot contact the other business owner. This scenario now is a case of missed payment. The other party should have rectified the situation within a reasonable timeframe and has failed to pay.
Strategies for Handling Late Payments
Suppose you send an invoice to your client containing your contact details, clear payment terms, the due date and suitable payment methods. You wait until the due date and find they have not paid. In this situation, you should be prompt and polite in your action.
1. Notify the Client of the Late Payment
First, let the client know their payment is late. Do this as soon as you notice the lack of payment, as early as possible following the due date. Keep records of all communication between you and the client.
2. Offer Alternatives
The client may find it easier to pay via an alternative payment method. For example, if the invoice requested a lump sum, you might allow them to pay in smaller instalments over a set duration.
Beyond alternative payment methods, you can also offer them an extension, giving them more time to send funds. However, if you extend the payment date or method, do so clearly and in writing.
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Strategies for Handling Missed Payments
Suppose the payment’s due date passes, but the client fails to pay via the alternative payment method or by the rearranged date and does not communicate with you. Accordingly, you need to handle this as a missed payment. In these situations, you may need to consider legal processes.
1. Send a Letter Before Action
Send a letter to the client notifying them of their debt and your intention to pursue legal action if they still fail to pay. This is a letter before action (or a letter of intent). The client might pay at this point, worried about you bringing legal proceedings against them.
At this stage, it can be beneficial to seek legal advice. A lawyer can guide you through the debt recovery process.
2. Alternative Dispute Resolution
If the client does not pay because they are unable to, rather than unwilling to, you might seek alternative dispute resolution. For example, you might use an independent mediator to help you negotiate a solution with the client. You should exhaust out-of-court methods like this before resorting to a court.
3. Further Legal Action
You can take formal legal action if the client is unwilling to pay. Such action can involve court proceedings. Assuming you are successful, you can obtain a court order for the client to pay.
4. Debt Collection
Another method of debt recovery is using a debt collection agency to recover the debt for you. Many different kinds of debt collection services are available. If you want to use an agency, research and find the right service for your needs.
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Key Takeaways
This article has outlined several steps a small business owner should take to recover debt. These include the following:
- promptly and politely notify the client of their non-payment;
- communicate with them further, perhaps negotiating an alternative payment method or date;
- if the client fails to pay, consider sending a letter before action notifying them of your intention to seek legal action;
- consider seeking legal advice to support you through a formal debt recovery process;
- pursue alternative dispute resolution if appropriate;
- seek formal legal action, such as court proceedings; or
- another option is to recover the debt through a debt collection agency.
If you are a small business owner who needs advice about debt recovery, our experienced startup 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.
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