Taking a systematic approach to debt collection is always beneficial. It’s important to have fixed processes in place, as failing to collect debts efficiently can lead to a multitude of problems for your business, says Chris Bristow, a business debt expert at Real Business Rescue.
Writing on the York and North Yorkshire Growth Hub web site he says issues such as increased bad debts, financial decline, or even cash flow insolvency and liquidation, can emerge when businesses arem’t paid for the work they’ve carried out. “Although this may seem like an impossible situation to resolve, you do have several potential paths available.
“Initially, you should consider whether your debtor is insolvent as they may be taking steps to enter a formal procedure, such as company administration or liquidation. In this case, the officeholder will contact you as a business creditor. If not, here are some of your options when faced with a debtor who refuses to pay:
Debt collection agency: Placing the problem in the hands of a reputable debt collection agency offering a no collection, no fee arrangement can bring results. Using them to contact your debtor may lead to full settlement, but if it doesn’t, you can also instruct the debt collector to begin legal proceedings on your behalf.
If you want to preserve your trading partnership with the debtor, a formal demand letter may be enough to persuade them to pay, or at least acknowledge the debt so you can begin negotiations on repayment.
Formal demand letter: An official demand letter sets out the details of the outstanding debt. If your debtor acknowledges that the debt exists, you may be able to negotiate with them to repay in instalments over an extended period.
Money claim: The money claim service can be used to file a claim against debtors who live in England or Wales. Your debtor can make a counterclaim or file a defence. If they’ve been refusing to pay they may simply not respond. If the court makes a judgment in your favour, you can enforce it if it remains unpaid by instructing a bailiff service to seize assets, for example.
Statutory demand for payment: Sending a statutory demand for payment after the demand letter gives your debtor 21 days to pay the sum in total, or 18 days in which to ask the court to set aside the statutory demand.
They need to have strong evidence to support such an application – documentary evidence that the debt has already been paid, for example. You may be able to send a statutory demand if your debtor is an individual and owes £5,000 or more, or at least £750 if the debtor is another business.
Winding-up petition: On continued refusal to pay a statutory demand, you can apply to the court to wind up the business using a winding-up petition. If supported by the court, a winding-up order will be issued and the business will have to enter compulsory liquidation.
Considerations when taking action against a debtor: If your debtor has been consistently unreasonable over the money they owe, you may welcome the end of the trading relationship given the cost of chasing this type of debt. You might still value their business, and think they may pay at some point. In this case, a softer approach might be more successful in the long run.
In other circumstances, your only chance of recovering part of the debt might be by enforcement through the court. Ultimately, if you decide to proceed, acting quickly is always recommended. Your business can suffer serious cash flow issues if you have too many debtors who don’t pay on time.
