Debt Collection

To avoid bad debt or pursue debt collection, ensuring you have a well-drafted set of business terms and conditions is essential. While this does not preclude a party from not making payment under the terms, it provides a clear structure to pursue the debt if it occurs. It is also vital to send invoices with clear invoicing terms, and it may be worth considering a short payment period. If customers do not pay within the payment period, you can send a letter of demand for the outstanding amount. This article will explore how your business can avoid clients being indebted to you and the steps you can take.

Business Terms and Conditions

There are three high-level considerations when preparing terms and conditions. Having each of these, and further terms to cover the provisions of the goods or services, may help you get paid for your products or services or provide a clear guideline where clients fail to pay.

Scope – Products or Services

You may have a proposal or an order form to determine what products and services the customer requires you to provide. The proposal or order form should have terms and conditions attached, which detail the rights and obligations of both parties. This is part of the contract between you and the customer. Having a clear scope can help avoid disputes as both parties are clear on expectations and obligations. 

Acceptance

Well-drafted terms and conditions determine how a customer can accept and execute the terms. We recommend having your client sign the terms and conditions as standard practice. This can be by physical or digital signature.

Payment

Terms and conditions should also set out your payment methods, terms and each party’s obligations. You may choose to:

• receive payment in full up-front;
• take a deposit; or 
• have customers regularly pay, such as every month.

If customers pay afterwards, that is, if you provide goods or services on credit, you can choose how many days you want to allow. You may require payment on 7 days, 14 days, 30 days, etc.

Your terms and conditions can state that if an invoice is unpaid, you may:

• cease providing products or services;
• charge interest on unpaid amounts;
• engage debt collection services; and
• take the matter to court.

You can use the terms and conditions and invoice as evidence of a debt in court.

Invoices

Once you have provided the service or product, be sure to invoice promptly. It seems obvious, but many businesses fail to follow this critical step. 

However, regardless of how efficiently you invoice your customers, if your invoice lacks the necessary details, customers may attempt to dispute the invoice and delay paying you. Some key elements to include in your invoice are: 

1. Scope of Work: Clearly identify the scope of work completed for your customer, i.e. the products and services you provided.
2. Amount: The invoice needs to set out all amounts owing, including amounts for the services or products and amounts for delivery, tax and other items.
3. Payment Time: Having a shorter payment time helps you get paid quickly. A shorter period allows you to receive funds quickly and allows you to immediately note if a customer does not pay.

Additionally, you should make it easy for people to pay by offering several payment methods like direct debit, cash, cheque, credit card and online payment platforms. Similarly, you may offer a discount for early or upfront payment. Customers are often motivated to pay more quickly if they can pay less. Thus, even a slight discount can make a difference.

Letter of Demand

Misunderstandings can arise, and customers can be difficult. Even if you have clear terms and conditions and invoice promptly, sometimes payment is delayed, or there is a dispute over the goods or services provided.

You must address these concerns immediately if there is a dispute about the products or services provided. If you sell to consumers, you must follow the consumer guarantees in the Australian Consumer Law regarding when you must give a refund, repair or replacement. The Australian Consumer Law also states when you are not required to give a refund, repair or replacement, including for change of mind.

If payment is not made and you have exhausted all efforts to settle any dispute with your customer, you can escalate the matter by sending a letter of demand.

What to Include in Your Letter of Demand

The letter of demand should:

• clearly outline who the parties are (e.g. including ACN/ABN for business and full details of individuals);
• state the amount of the debt owing and indicate whether the amount includes or excludes GST;
• include a clear description of the goods or services which were provided;
• provide evidence of the debt, including the proposal or order form and terms and conditions;
• attach a copy of the invoice(s) sent;
• provide a payment deadline (e.g. 14 days); and
• set out how the customer can pay the debt, e.g. direct debit, cash, cheque, credit card and online payment platform.

You may also include correspondence, such as emails, which show an agreement to pay for the products and services you have provided to the customer.

Furthermore, you can include in your letter of demand that you may commence legal proceedings to claim the debt if the customer does not pay the debt by the payment deadline.

Debt Collector

If you have not received payment for your invoices, you may consider engaging a debt collector. A debt collector recovers payment on behalf of another person for outstanding debts that individuals or businesses are legally obliged to pay. Debt collectors will have their processes and fees in place, some working on a ‘no win, no fee’ basis, only collecting payment from you if they successfully get your customer to pay. 

Alternatively, some debt collectors may offer an option to ‘buy’ debt from you at a loss (e.g. 20 cents to the dollar). In some circumstances, it is more commercial to bundle up several unpaid invoices and receive some of the money back rather than none. 

Court Proceedings

If you are unsuccessful in either chasing the debt yourself or engaging a debt collector, you may consider whether commencing formal court proceedings is your next best option. Court proceedings are costly. Moreover, there is no guarantee that you will be successful or can enforce payment of any judgement made in your favour. For these reasons, it is essential that you have exhausted all other options and attempted to settle any dispute before commencing court proceedings. 

All state and territory courts have a small claims division or equivalent for small claims debt recovery. The amount of the small claim varies by state. In NSW, claims of up to $10,000 are heard in the Small Claims Division of the Local Court. You can attend by yourself or with a lawyer. To start a claim, you must fill out and file an originating claim document with the Court. The procedure will vary by state. In NSW, this document is a Statement of Claim form. The originating claim includes the details of the debt and the debtor. It must be filed at the court, and you must pay a filing fee. You must then serve a copy of the claim on the other party under the court’s rules. 

If you continue with legal proceedings, the letter of demand, invoices, and terms and conditions can be taken to court and used as evidence of the debt owed.

If your claim is larger, it may need to be filed in a higher court. In NSW, claims greater than $10,000 but under $100,000 can still be heard in the NSW Local Court by the General Division. Claims over $100,000 will be heard in the District or Supreme Court.

Key Takeaways

Having clients owe you debt can be very difficult on your business. As such, it is important to draft your terms and conditions and implement appropriate payment strategies to minimise that happening. Nevertheless, should it arise, you may consider issuing a letter of demand, seeking the services of a debt collector or pursuing legal action.

If you need help with a debt, our experienced dispute lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions