It’s a situation no business owner wants to find themselves in — you’ve delivered products or services in good faith, but your client has failed to pay. Despite polite reminders and increasingly stern letters, the debt remains unpaid, leaving you frustrated and out of pocket.
When this happens, it’s time to explore your options for debt recovery. Though the path may be difficult, reclaiming what is rightfully yours can be deeply rewarding.
This guide will walk you through the key strategies and methods to turn bad debt into recovered revenue. With the right approach and professional support, you can emerge from the debtor’s shadow stronger and wiser — and with the cash you are owed.
Preventing Bad Debt
Taking steps to prevent bad debt can save your business significant time, money, and headaches down the road. Here are some key strategies to avoid bad debt:
- Conduct thorough credit checks on new customers – This will help you assess if a customer has a history of late payments or defaulting before you offer them credit terms. Check credit reports from agencies and ask for trade references.
- Have clear payment terms – Set out payment deadlines, acceptable payment methods, and late fees in your contract or on invoices. Get customers to agree to terms in writing.
- Offer payment plans if needed – Consider breaking up payments into instalments for large orders or customers who may require more time.
- Send invoices promptly – Send invoices as soon as work is completed, clearly stating payment terms and due dates. Follow up with reminders as the deadline approaches.
- Stop work if payments are late – Be prepared to stop current work and decline new orders from customers who are late paying. Enforcing this consistently will encourage good payment habits.
- Address issues early – At the first sign a customer may not pay, get in touch to discuss the situation. Offering tailored payment plans or adjustments early is better than dealing with a large debt later.
- Keep clear records – Maintaining thorough documentation of payments owed and received will help you identify problem accounts and have evidence to pursue legal action if necessary.
Taking proactive steps and having clear policies around payments and credit will help minimise the risk of late payments and bad debts. This protects your cash flow and prevents you from taking expensive debt recovery efforts down the line.
In-House Debt Collection Strategies
Before turning to outside agencies, you may want to try some in-house debt recovery strategies first. This allows you to control the process and preserve your business relationships. Some techniques to try include:
Payment Reminders
Reach out to customers with overdue invoices to remind them that a payment is due. A friendly phone call or email can jog their memory. Just be sure to maintain a professional, courteous tone and avoid sounding accusatory. Set reminders to follow up regularly if the first request is ignored. Continue providing reminders until you get a response.
Incentives
Consider offering an incentive if customers pay within a certain timeframe. For example, you could provide a 5-10% discount on the balance if they pay within 30 days. This gives a nudge to settle accounts. To sweeten the deal, you can also offer value-added services, such as priority support or extended warranties. But, check the incentives are worth the cost of recovering the debt faster.
Flexible Payment Options
Sometimes, customers want to pay but need help. Offer flexible payment plans, instalment options, or break a large balance into smaller chunks. This makes it more manageable for customers. Be open to negotiating payment terms that work for both parties. Get partial payments upfront if possible. By accommodating reasonable requests, you increase the chance of recovering at least some portion of the debt.
The key is maintaining open communication. Work with customers to facilitate payments, not frustrate them. Understanding and flexibility can go a long way.
Using Debt Collection Agencies
Business owners may consider using debt collection agencies if their in-house collection efforts have not succeeded in recovering debt. Debt collection agencies can be an effective tool, but there are some key factors to consider before using them.
When to Use Debt Collection Agencies
- After multiple failed collection attempts and demand letters from your business
- For older debts that are more difficult to collect on
- For delinquent B2B accounts receivable with terms extending 90 days or more
- For debts owed from customers outside your local jurisdiction
Pros of Using Collection Agencies
- Saves your staff time from making collection calls and sending demand letters
- Uses the collection agency’s expertise and dedicated recovery resources
- Provides a sense of authority and urgency from a third-party agency
- Allows you to focus your internal efforts on serving customers
Cons of Using Collection Agencies
- Collection fees can range from 20-50% of recovered debts
- Potential damage to customer relationships and public reputation
- Loss of control over the collection interaction and legal process
Choosing a Reputable Collection Agency
- Research industry reviews and complaints registered against an agency
- Ensure they follow debt collection regulations and consumer protection laws
- Ask about their processes and policies to uphold your company’s values
- Select an agency that specialises in your location and customer segments
- Be wary of outdated collection methods or aggressive attitudes toward debtors
Reputable debt collection agencies can be valuable partners in recovering bad debts. But be sure to research options thoroughly first and aim to use their services sparingly to supplement internal collection efforts. Maintaining strong customer relationships should take priority over aggressive collection tactics in most situations.
Legal Debt Recovery Methods
If in-house collections and debt collection agencies fail to recover unpaid debts, the next step is to pursue legal action. There are a few standard legal methods that businesses use to recover bad debts:
Letters Before Action
Before going to court, it is standard practice for creditors to send a formal demand letter to the debtor. This is known as a Letter Before Action (LBA) or ‘letter of claim’. The letter sets out details of the debt and requests payment within a specified time frame, usually 7-14 days. If the debtor does not respond or pay after receiving the LBA, the creditor can proceed with court action.
LBAs should be written by a specialist legal firm, as there are regulations around the required content and format. A good LBA will clearly identify the debtor, explain how the debt arose, state the total amount owed, and request a reasonable repayment timeframe. The letter should be polite but firm in setting out the consequences if payment is not made, i.e. court proceedings.
County Court Judgments
If an LBA does not recover the debt, the next step is to issue a claim through the County Court Money Claims Centre. This leads to a County Court Judgment (CCJ) against the debtor if they cannot successfully defend the claim.
A CCJ formally states that the debtor owes the creditor money and orders them to repay it. If they fail to pay after receiving a CCJ, enforcement action can be taken to seize their assets. Having a CCJ recorded publicly against their name may also hurt the debtor’s credit rating.
Again, you should seek professional legal advice before starting a claim.
High Court Enforcement
Once a CCJ is awarded, the creditor can escalate the debt recovery to the High Court for enforcement if the debtor refuses to pay. High Court Enforcement Officers (HCEOs) have greater powers than bailiffs to seize assets and property to settle the debt.
Key Takeaways
Recovering unpaid debts can be a challenging process for any business, but it is vital for maintaining cash flow and profitability.
The key steps to effective debt recovery are:
- Aim to minimise bad debts proactively by vetting customers, using payment plans, and issuing reminders.
- Use letters, calls, and emails to request payment directly from debtors. Be persistent yet professional.
- Consider employing a debt collection agency to recover monies owed. Ensure they comply with regulations.
- Explore legal options like statutory demands, CCJs, enforcement agents, and insolvency proceedings. Seek legal advice.
- Aim to recover debts quickly, as the likelihood of payment decreases over time. Act before debts become uncollectable.
Recovering debt can be time-consuming, but doing nothing could seriously harm your business. With the right strategies, processes and professional support, you can collect monies owed and maintain a healthy cash flow. Contact Birch Law today to explore your debt recovery options.
