Debt is one of the realities of business. Even if your customers pay within the allocated terms, it's your business that is carrying the risk. Many businesses avoid thinking about debt until they are in a position where they are faced with a potentially ruinous situation of a large debt and insufficient capital to keep the business operational.

While no one could suggest dealing with outstanding debts is the nicest part of running a business, a consideration of the process and the options available to you will help to reduce the stress and uncertainty of such situations.

Internal - Terms and Communications

Are your terms clearly stated on your invoice and terms of service? If not, get them on! Once an invoice reaches the term time (or even a few days before) a documented prompt in the form of a friendly e-mail is a useful tool which will often result in payment or at least a contact to alert you of a possible issue. If the communication is open and ongoing then it is probably better to negotiate your way through the resolution of the debt between yourself and your customer. Although if any extended terms are agreed, it would be sensible to have these documented and agreed by e-mail as an added item on the paper trail.

Professional Support

If you find that the communication has broken down, the client is avoiding your calls, e-mails, etc. and has not made contact to conclude the matter, you will need to consider your next stages in the form of professional help. In broad terms, firms which offer debt recovery services can be either debt collection agencies or law firms with a debt recovery service. Debt collection agencies have sometimes been portrayed as heavies at the door – and sometimes they can be! However effective such an approach can be, it may be likely that some form of legal action will need to be taken.

First stage is what's known as a Letter Before Action (LBA). The classic solicitors letter. For the vast majority of commercial debts, this is all that's required and although this will cost you, the fee may be recoverable in addition to the original debt.

If there is no response from the LBA, then a claim is issued in the county court. If there is no response at this stage, then you can request Judgment. In both of these processes, there will be fees to pay – both for the solicitor to process the claim and court fees. However again though, these amounts are added to the original debt along with interest.

Once the Judgment has been entered against the debtor, if it is not paid as per the order you are free to take enforcement action. This may include instructing the High Court Enforcement Officer to attend the property to remove goods to the value of the Judgment. The cost of enforcement is again added to the original debt.

In the worst case scenario you may need to make the decision to wind a company up or issue bankruptcy proceedings against an individual. Though this tends to be a last resort as these are costly actions to take.

If, at any stage, the debt is contested, then you will need to work closely with your legal team to plan the best course of action. It may not be economically viable to continue with the claim depending upon the size of the debt.

As a business owner it is important to bear in mind that debt can be a fact of life that needs to be managed effectively. I would always suggest engaging the legal route simply as this is a professional service that provides options at each stage. In all cases you need to act as soon as it is apparent that you can not resolve the matter yourself in a reasonable manner or timescale – remember that there is a good chance that if this client has not paid you, they may have a string of creditors chasing them for outstanding invoices – and it's the squeaky wheel that gets the oil!

Article by John Tait of SRF Debt.

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