How to effectively chase invoices and recover unpaid debt from clients
How to effectively chase invoices and recover unpaid debt from clients
Chasing overdue invoices and trying to recover unpaid debt can cause a significant issue to effectively running a business, as it is a source of distraction and a drain on employee/management time.
Government guidelines stipulate that a customer must pay you within 30 days of your goods/services, unless other payment terms were agreed between the parties. Anything agreed for longer than 60 days must be fair to the parties involved.
You could mitigate the risk of having to chase invoices and or non-payment by asking for payment upfront or, at the very least, a deposit from the client at the outset.
At The Jonathan Lea Network, we recognise the need for our clients to collect unpaid debt in an efficient manner. This blog post outlines how to chase invoices and recover unpaid debt from clients, all the while maintaining a collaborative and professional business relationship. This blog post will also examine what measures your business can take in the event that clients do not pay their debts and what action to take if your client refuses to pay.
Ensure your facts are correct and focus on long-term relationships
Even if you have not received payment for your goods/services, it is always important to think about the long-term relationships that you are building or have already established with your clients. Dealing with clients involves good judgment and it is important to conduct yourself in a professional and understanding manner throughout the debt recovery process.
Setting out clearly your terms of payment to the client early on in your business relationship can prevent problems further down the line. Explain when you will invoice the client and what the payment terms will be (it is advisable to have such terms set out in a set of well-written, clearly structured terms and conditions).
Before demanding payment from clients, ensure that the details and facts that you have are correct. Another tip is to make sure that you have an accurate record of correspondence with the client and that you follow a fair process. If a client feels that you are being unfair or aggressive in chasing the debt this may jeopardise your business relationship with the client. It is worth bearing in mind that business owners can often get side-tracked with running their company and so non-payment of an invoice can often be innocent and unintentional.
Sending a friendly email reminder and establishing your client’s position
Considering the above, it is advisable that the first point of action is to send a friendly reminder to the client after the date that the invoice amount becomes due (you could do this once the invoice has been outstanding for 48 hours or more). Set out a friendly reminder in the email and ensure that the client has received the original invoice. To avoid wasting time, attach a copy of the original invoice in your email in the event that the client (for whatever reason) has not received the invoice.
If you receive no response from your client in respect of the first email, then follow-up with a second email reminder once the invoice has been outstanding for one week or more. If you do not receive a response within the next 24 hours from the second email then contact your client by telephone to check if they have received your previous email reminders and attempt to confirm when they will pay their outstanding debt. Confirm what was discussed with your client in an email following your call. This will summarise the current situation and mitigate any possibility of your client disputing what was discussed over the phone.
If the invoice has still not been paid following the first phone call, then call the client again a week after the first call was made, informing them that the invoice still remains outstanding. It is important to make a note of who you spoke with and when, and you should confirm any discussions via email after each phone call so that there is a clear timeline of events with supporting evidence in the form of email correspondence at each stage.
Actions to follow if your client refuses to pay or is unresponsive
If, following the second phone call, seven days have passed and the debt is still outstanding, then at this point you should send a formal letter to the client requesting payment of the invoice. This letter should make clear that interest is being applied to the debt and accruing and that the sooner the client pays the invoice the less they will have to pay. Under the Late Payment of Commercial Debts Act 1998, you can claim interest for your invoice debt at 8% above the Bank of England base rate (which was 0.1% as at April 2020).
This will involve calculating the daily rate of interest being accrued, and can be done by conducting the following calculations:
Work out the annual interest
Calculation: [Amount being claimed] X [8 + current Bank of England base rate / 100]
For example, if the debt was for £2,000, the calculation would be as follows:
2,000 X 8.1 /100 = £162 per year (given that 8.1 / 100 = 0.081 and 2,000 X 0.081 = 162).
Work out the daily interest
Calculation: [yearly interest] / 365
Using the above example again, this would be 162 / 365, which is approximately £0.44p per day.
If the invoice was overdue by 30 days this would be £13.20.
If you have attempted to contact your client and they have persisted in avoiding payment of the invoice or have consistently refused to speak with you regarding the debt, then a more assertive approach can be adopted. It is important when adopting this approach to engage in constructive correspondence with clients pursuant to the Pre-action Protocol for Debt Claims (“Debt Protocol”). This is the first step that a court would expect your business to take before issuing court proceedings.
- Letter before claim
If the first formal letter is ineffective, the next step would be to send the client a ‘letter before claim’.
The letter before claim should contain certain detail, including:
- The date of the original invoice;
- How much is owed by the client;
- What the invoice relates to (i.e. in respect of what goods or services it was issued);
- The contact name of the person that agreed to the work or approved the goods/services;
- The agreed payment terms; and
- Should make one final request for payment.
This letter demands payment of the debt plus any applicable interest within 30 days and should make clear that, if payment is not made within this time period, then court proceedings will be issued and further costs will be incurred by the client. You can specify a shorter time period by which the client must respond if that is desired, for example 7 or 14 days from the date of the letter, however the default position under the Debt Protocol is that if the debtor (i.e. the client) does not reply to the letter within 30 days of the date of the letter, then the creditor may commence court proceedings.
You can send this letter to the client yourself, although it is advisable that you have a solicitor draft the letter and send it to the client on your behalf, given that the letter will need to comply with the Debt Protocol and be sent to the client along with certain supporting documents. Instructing a solicitor to carry out this kind of work is relatively inexpensive, ensures that the letter contains all of the correct detail and is structured properly, and most importantly can make it clear that you are serious about recovering the debt from them.
If the letter before claim does not elicit any kind of response from the client and the debt still remains outstanding, then you should consider appointing a mediator to resolve the dispute between you. Using mediation or another form of alternative dispute resolution (“ADR”) is always recommended at the outset as this could enable the parties to settle their dispute without commencing lengthy and expensive court proceedings. If a debt dispute proceeds to litigation, the courts will expect the parties to have attempted some form of ADR before proceeding with a court action.
If mediation is being considered, the potential associated costs should be considered in relation to the amount of the debt.
Note importantly that an unreasonable refusal to consider ADR, or a failure to respond to such an invitation, may be held to constitute unreasonable conduct, and may result in sanctions being imposed by the court should the matter proceed to litigation. Therefore, a creditor may gain a strategic advantage by suggesting an appropriate form of ADR in the letter before claim.
It is important not to rush into commencing court proceedings if this can be avoided. If you get to this stage and the client has still not responded to the letter before claim within 30 days from the date of the letter, then there are other alternatives that can be pursued, such as serving the client with a statutory demand for payment or making a claim via the government’s online money claim service.
A statutory demand is a written demand for payment of a debt served on either:
- An individual, in accordance with section 268(1) (a) of the Insolvency Act 1986 (“IA 1986”).
- A company, in accordance with section 123(1) (a) or 222(1) (a) of the IA 1986.
Note that you will only be able to serve a statutory demand if the outstanding debt is for more than £750 (for companies) and £5,000 (for individuals) and the debt has been outstanding for at least three weeks.
In general terms, a debtor who, for three weeks, fails to comply with a statutory demand for a debt of more than £750 (for companies), or a debt of £5,000 or more (for individuals), is at risk of having bankruptcy or winding-up proceedings issued against it. For this reason, serving a statutory demand may be a means of exerting pressure on an individual or company to pay a debt. It is often the first step taken by a creditor who intends to present a bankruptcy or winding-up petition against the debtor. However, there is no obligation on a creditor who has served a statutory demand to commence insolvency proceedings against the debtor.
A statutory demand does not commence court proceedings, is not a court document and does not need to be issued at court. The process has the following potential advantages:
- It does not involve the courts from the outset.
- Preparing and serving a statutory demand is quick and inexpensive.
- It can either result in prompt payment of a debt, or flush out details of any dispute or cross-claim.
On the other hand, serving a statutory demand may have a negative impact on an ongoing trading relationship, which is worth bearing in mind. It may be perceived as an aggressive step given that it can lead to court proceedings.
The government’s online money claim service can also be used and involves paying a fee (the amount of which will depend on the amount of the claim/debt). Note importantly that this service is only for claims of £10,000 or less, and so if the claim is for more then a statutory demand could be a more viable alternative. You must also know how much is owed in order to use this service and be able to provide a specific figure.
Some further points to note in relation to the government’s online money claim service:
- You cannot use the service if the claim is against more than one person or organisation. Likewise, you cannot use this service if more than one person or organisation is making the claim.
- You can only use this service to claim against a person or organisation with an address in England and Wales.
- The service is only available for claimants representing themselves (and so cannot be made by a solicitor on behalf of a claimant).
- To use the service you must have an address in the UK.
- You cannot make a claim for a tenancy deposit using this service.
- You can’t use this service to claim against government departments.
- You can only use this service to claim against a defendant who’s 18 or over and you need to be 18 or over to use this service.
- Issue of Proceedings
If your client refuses to respond to your letter before claim and persists in not paying the invoice, the next step for your business would be to take court action and commence legal proceedings in order to resolve the claim. Although this could have a negative affect on your business relationship with the client, this point of action may be one of last resort in order to receive payment for your services.
There is a simple online process for making claims under £100,000 and you may be required to attend court if your client disputes the claim.
Alternative method for collecting unpaid debts
Instructing a Debt Collection Agency
We understand that the process outlined above can involve a lot of time and effort, and therefore if your business does not have the capacity to pursue late invoices or if you want to focus on other areas of your business rather than spending time chasing clients for payment, you could opt to pursue unpaid client debts through an independent debt collection agency. These agencies will run a similar procedure of contacting your clients and writing letters on behalf of your business requesting payment of the debt.
Debt collection agencies will typically endeavour to preserve your business relationship with your client and will usually operate on a ‘no collection, no fee’ basis. However, when considering using a debt collection agency it must be taken into account that the debt collection agency will take a proportion of the unpaid debt in respect of their services. The debt collection agency will usually take approximately 5% to 15% of the amount collected as payment for their services.
Below are some points to note when you are considering appointing a debt collection agency:
- If possible, only agree to contract with an agency on a no-collection, no-fee basis.
- Only appoint a reputable firm as they will be representing your name and brand. In accordance with this, do not appoint an agency where you suspect the use of ‘heavy tactics’ to retrieve outstanding debts.
- Use an agency that is registered with the Financial Conduct Authority (“FCA”).
- Ask for the agency’s terms and conditions and read these carefully before appointing them (you could instruct a law firm to review the terms and conditions to check for any “nasties”).
- Do not pay upfront or registration fees.
- Ask for references and follow them up.
How we can help you
The Jonathan Lea Network can assist you in disputes relating to debt collection that arise from clients not paying their invoices. We regularly assist our clients with such matters and if you would like to learn more about our services in this area, we would be happy to have a 20-minute no cost, no obligation call to discuss your situation and provide a quote.
In the first instance we ask potential clients to email our wewillhelp@jonathanlea.net email address, setting out an introduction to who you are and any relevant background facts and supporting documents. This then allows for one of the team’s fee earners to review such information before the call and make the most of the 20 minutes available.
We have also released a ‘debt claim product pack’ on our website’s e-commerce shop which is available for purchase to assist clients with recovering unpaid debts from clients.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023.
