Are you a small business or a sole trader in the UK? Do you know how to collect a debt from a business in the UK? As a small business, you cannot afford to be owed money and litigation can be very expensive without a guarantee of success. Follow my easy process and save time and money!
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Firstly, determine if it is a debt or merely an overdue payment. An overdue payment might only require a gentle nudge from you via phone, email, or letter requesting payment. Allow your customer a maximum of 7 days overdue.
When the invoice becomes seven days overdue, send a polite first reminder letter.
If the customer has a history with you, recognise any changes in their payment behaviour. Regular payment patterns may change, and if their payments become irregular and they are unresponsive, it is time to take the debt collection process seriously.
2. Your Formal Debt Collection Process
Once reminders and calls fail, it’s time to start your formal debt collection process. Each business has its own timeframe for allowing a customer to pay before starting this process. In general, I allow customers to be 14 days past terms before starting the formal process.
If you hope a customer with a four-year-old debt will pay without following a formal process, they won’t. A formal debt recovery process increases your chances of obtaining your money.
3. Research the Company
Begin by obtaining a credit report on the debtor to check their financial status and verify their address. This is crucial in case your debtor has moved premises. These checks also give you an indication of how successful you may be if you take legal action. Research the company on Companies House website
4. The Letter Before Action
Next, send a Letter Before Action (LBA), also known as a Letter Before Claim. A well-written LBA resolves 80% of cases, as the customer realises you mean business and may pay immediately.
If the debtor is a limited company, allow them fourteen days for full and final payment. For sole traders or consumers, follow the “Pre-Action Protocols” and allow 30 days for payment.
5.Don’t Forget to Add the Late Payment Fee
Add a legal Late Payment Fee as allowed under the Late Payment of Commercial Debts (Interest) Act 1998 if you haven’t already done so. The fee is £40, £70, or £100, depending on the debt amount.
Calculate your late payment fee
6. Fixed Payment Plan Alternative
Offering a fixed payment plan can be a great alternative to court action, particularly if your customer is experiencing temporary cash flow problems. A payment plan allows a business some breathing space and avoids the need for court action or a formal winding-up process.
Offer payment plans ranging from 5 to 52 weeks, depending on the debt amount and the debtor’s situation. Negotiate the best deal for both parties.
7. Setting the Plan
List each payment date and amount. For example, if a customer owes £1000, add the £70 Late Payment Fee, making the total owed £1070. Inform your customer that defaulting on this arrangement will lead to immediate court action.
8. Legal Action
If no payment is made or no payment plan agreed, the next step is legal action through the small claims court, initiated the day after the deadline given in your Letter Before Action.
Ensure you have the correct address before submitting court action. Enter both the trading and registered addresses.
Calculate your court fees for submission. Court fees are repayable by the debtor if you obtain a County Court Judgment (CCJ) or win the case. However, if the debtor is likely to go into administration or already has CCJs, your chances of success are slim, and you may have to bear the court fees.
9. Court Process
Once court action is initiated, expect a wait of 23 to 30 days, considering weekends. If the debtor does not respond to the county court claim, you can request judgment against the defendant.
After obtaining the judgment (CCJ), request a warrant using the county court bailiff or high court bailiff if the debt amount exceeds £600. High court bailiffs have more powers than county court bailiffs.
10. General: Common Reasons for Non-Payment
Other reasons why your customer has not paid, often only revealed once payment is overdue, include:
- Incorrect name and/or address on the invoice
- Wrong or faulty goods/service sent and unresolved query
- Incorrect invoicing amount
- Payment made but not allocated to their account
- Returned goods without a raised credit note
- Miscommunication with the correct department or person responsible for payments
- Incorrect or missing purchase order number, leading to unauthorised payment
- Discrepant payment terms despite stated terms on your invoice
To save time, reduce stress, and improve your chances of being paid without going to court, consider contacting Trade & Legal
#smallbusiness, #debtcollecting
