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A Step-by-Step Approach to Recovering Debt

Every business owner can agree that not being paid by clients and customers, is one of the most frustrating, yet common experiences.  The chances of recovering a debt reduces over time, so it’s important to be proactive to avoid unnecessary burden on your business and cash flow. So, here are some steps you can take to make sure you get paid.

Step 1: Have the Right Terms and Conditions

It is always best to start with a strong contractual foundation. You should ensure you have a legal contract in place with your client, or terms and conditions of trade which set out your payment terms. For example:

  • Consider receiving a deposit upfront or stage payments upon completion of milestones, rather than performing all of the work before you receive payment.
  • Clearly state when payment is due – e.g. 7 days after receipt of invoice.  

Payment terms can also set out what actions you will take if the client or customer fails to pay or is late to pay. For example, your terms could state that you will:

  • stop performing your services or will not send further goods until payment is received;
  • charge interest on any overdue amounts; or
  • charge for fees incurred if the debt is referred to a third party for collection 

Step 2: Send Invoices Promptly After Work Is Completed 

An invoice is a reminder to clients that money is due and sets out when to pay. Get in the habit of sending invoices as soon as the work is completed so you are front of mind of your client or customer.

What if they dispute the invoice?

If the client disputes the invoice, then you should try talking with them to work out a solution. Keep in mind that if you are selling products or services to consumers they have rights under the Australian Consumer Law to a refund, repair, or replacement in certain circumstances where the consumer guarantees are not met.  

Step 3: Send Reminders

If payment is overdue, consider sending some friendly reminders. These reminders should be polite and clearly outline your expectations for payment. You could contact the client by phone or email to remind them of the outstanding payment. These reminders can also help preserve your relationship with the client.

Step 4: Consider Contacting a Debt Collecting Agency

If trying to recover the money becomes too complicated, then you could consider contacting a debt collecting agency to recover the debt for you. Generally, debts are sent to debt collectors when payments are 90-120 days past due. Although for short-contract terms, this time may be shorter. Remember that the longer the debt is unpaid, the less likely you will recover the money. Debt collectors are paid professionals and can often increase your chances of recovering a debt – one letter or phone call from a debt collector can prove to clients that you are serious about debt recovery. 

Step 5: Send a Letter of Demand

A letter of demand is a formal letter sent to someone who owes you money. It is the final step you take before commencing legal action, so make sure you’ve tried the earlier steps mentioned above. If you engage a debt collector, they may even send this letter for you. Nevertheless, it is important that you’ve tried contacting the client to remind them of repayment before you send a letter of demand. We already have a useful article about letters of demand if you want to read more about it click here

Step 6: Commence Legal Proceedings

If your letter of demand has been ignored and nothing else has worked, then you can commence legal action against the client. It’ll be best to contact a lawyer to help you navigate this complex process. Legal action should be a last resort only and it is often required that you send at least one letter of demand to a debtor before lodging a claim. 

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