Every business owner needs to regularly check in on their business goals, whether they involve growing your business or just getting paid quicker (or at all). Regardless of whether you need cash flow for growth or survival, an essential activity for any business owner is to review your debt recovery process by:
- reviewing your accounts;
- identifying money that is owed to you; and
- seeking to have it repaid.
This article sets out the process from debt identification to (hopefully) repayment.
How to Know When You Haven’t Been Paid
Firstly, to ensure that you are on top of any debts that clients owe you, it is important that you regularly review and audit your accounts. It is a good idea to invest in business accounting software, specifically cloud accounting software. Small business accounting software that is not available on the cloud can be tedious and can take up far too much of your business’ time and effort.
The cloud platform ensures that:
- your business data is available online at any time and from any device;
- more than one person can have access to customer and financial details;
- you don’t have to worry about costly and complicated backups; and
- you don’t run the risk of losing data and losing track of debts. Accounting software like Xero run daily backups.
Good business accounting software allows you to have a clear overview of your current financial position in real time. Regularly reviewing and auditing your accounts should be easy if you have easy-to-use and accessible software that multiple users can access, such as an external accountant as well as the team. It is also possible to use business accounting software to automate debt identification and debt recovery processes.
What to Do When You Haven’t Been Paid
If you discover that you haven’t been paid, you should make recovering the debt a priority. It is generally easier to recover payments when the invoice and service or product you provided is fresh in their mind.
It is also likely that you will want to preserve the relationship with your customer. For example, it might be one of your best customers who owes you money or someone you hope to do business with in the future. The importance of maintaining that relationship is an important consideration at every stage of the debt recovery process.
Review the Terms of Your Contract
The first thing to do is review the relevant paperwork. You should read any contract, written agreement, terms of service or any other relevant correspondence between you and the client carefully. You should also check the payment conditions and the debt recovery options that might be set out under the terms of your contract.
If you have an oral agreement or a part oral and part written agreement, these terms are valid as long as you have proof of what you agreed. It is very important to ensure you have properly identified the amount that the client owes you and the terms for repayment so that you can communicate these confidently to the client. This will also help you avoid damaging the relationship by asserting an incorrect debt or a debt that is not yet due.
Have a Conversation
After reviewing the paperwork, it is a good idea for you or someone from your business to contact the client. Just as you might lose track of debts owed to you, it might be that the client has lost track of the invoice or is not aware of the debt. Be prepared with a payment date or the terms of a payment schedule. You can do this by phone, email, letter or in person.
If you have the conversation on the phone or in person, make a note of what was discussed in case you need to refer to it later. In the best case scenario, you could resolve the issue with a simple conversation.
Put It in Writing
If the debt remains unpaid, you might consider writing a letter of demand. This is a letter that you can send to the client demanding that they pay the outstanding amount of money. It is something you can create on your own or you can get help from a lawyer.
A letter of demand should:
- identify the debt owed and how that debt arose;
- set out the attempts you have already made to recover the debt; and
- set out a defined period in time when the client must repay the debt or resolve the dispute.
Ideally, the client will pay the full amount that they owe and you can move on with business as usual. The client may:
- try to negotiate a compromise, such as request a payment plan or a lesser sum that they can repay in full;
- contest the amount they owe; or
- ignore the letter.
Get Help With Dispute Resolution
If you cannot resolve the matter and the debt remains unpaid, you might consider Alternative Dispute Resolution (ADR). ADR is an alternative to going to court to resolve the issue. The ADR process is generally quicker and cheaper than going to court and gives you more control over the outcome. There are three common types of ADR for dispute resolution.
Facilitation is a process where you and the client identify the problem with the assistance of a facilitator. The process may end there or the facilitator may assist you and the client to:
- develop options;
- consider alternatives; and
- hopefully reach an agreement.
The facilitator can not determine who is right or wrong, nor can they determine an outcome. However, they oversee the process and try to facilitate an outcome.
Conciliation is a process where you and the client identify the issues that you cannot agree on, with the assistance of a conciliator. The conciliator will then come up with options or alternatives which might help you reach an agreement. The conciliator is often an expert in the subject area and may use their expertise to give you advice on likely terms of a settlement. However, the conciliator cannot determine the outcome of the dispute.
Mediation is a process where you and the client identify the issues and develop options to reach an agreement with the assistance of a mediator. Unlike a conciliator, the mediator cannot advise you in any capacity.
If you would like to use ADR, you can visit Dispute Support, an online tool to help you find a low-cost ADR service in your area.
Take Legal Action
After exhausting all of your other options, it may be appropriate to commence legal action. You will need to complete a statement of claim form and file it at a court. The specific court that you will need to file it in will depend on the amount of the debt. You would go to the:
- Local Court if the debt is under $100,000; or
- District Court if the debt is more than $100,000.
However, if the dispute relates to money, goods or labour (or a combination of these) with a value of less than $10,000, it is considered a ‘small claim’. The small claims process is relatively informal and generally, costs are not awarded.
There are two steps involved in the small claims division in New South Wales:
- Once you have filed your application with the court, you and the client must attend a ‘pre-trial review’. This is like a mediation conference with the goal of settling or resolving the matter without the need for the court to set a hearing date. If no agreement can be reached, the court will decide your matter. If you are successful, the client will be ordered to repay the debt according to terms that the court decides, including the amount of money.
- Subsequently, the debt must be enforced. In other words, the client still has to be made to pay. This often involves taking enforcement action such as obtaining a writ of execution against the client’s property or securing a garnishee order against their wages or bank account.
This process is similar in most other Australian states and territories. However, you should check the website for the Local Court or Magistrates Court in your state to familiarise yourself with the relevant process.
Risks Associated With Going to Court
You should carefully consider whether to take your matter to court. Going to court can be expensive and take a lot of time. There is no guarantee you will get your money back and there are fees you will need to pay that won’t be repaid if you lose the case.
Consider whether the client is in a position to pay the debt. A lawyer can help you decide if taking the matter to court is commercially sensible. It is important to remember that if you start legal action, you have to be able to prove the debt you are claiming. If you cannot do so, you may be forced to pay the legal costs of the other party.
It’s necessary to your business’ future that you follow up any outstanding debts that clients owe you. To recover these debts, you should:
- review and audit your accounts using cloud accounting software;
- review the terms of your contract with the client;
- talk to the client;
- put any demands or correspondence in writing; and
- use ADR if the client refuses to pay the debt.
If the client still refuses to pay their debt, you have the option to proceed to court. However, you should be aware of the costs and risks associated with doing so. If you want help to recover a debt or get advice about whether to go to court, you can contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.
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