Unpaid invoices are more than an inconvenience.
For small and growing businesses in particular, late or non-payment can quickly create cash-flow problems. Your business may still need to pay employees, suppliers, rent and other overheads while waiting for money that should already have been received.
You may have sent several reminders and been promised that “payment is on its way”, only for nothing to arrive.
So, when should you stop chasing informally and start considering legal action?
Check exactly what you are owed
Before escalating matters, establish precisely what is outstanding and why.
Check the invoice, contract, purchase order and any applicable terms and conditions.
When was payment supposed to be made? Is the whole invoice outstanding or only part of it? Did the customer agree to the amount being charged?
You should also review your correspondence with the customer to establish whether they have raised any complaint or attempted to dispute the invoice.
Contact the customer
Not every unpaid invoice immediately requires legal action.
Sometimes invoices are missed, sent to the wrong department or delayed because of an administrative problem.
A polite reminder may resolve the issue.
If it doesn’t, your correspondence can become progressively more formal. Make clear which invoice is outstanding, the amount owed and when payment was originally due.
Keep a record of your attempts to recover payment.
What if the customer keeps promising to pay?
Repeated promises of payment can leave businesses waiting for weeks or months.
If a customer tells you they will pay on a particular date, consider confirming that agreement in writing.
If the promised date passes without payment, you then have a clear record of what was said.
At some point, it may become necessary to move from informal reminders to a formal recovery process.
What if the customer disputes the invoice?
This can make matters more complicated.
A customer might argue that the goods were defective, the work was incomplete, the amount charged was not agreed or your business failed to perform its obligations.
The issue may therefore become a contractual dispute rather than simply an unpaid invoice.
Review the underlying agreement and gather evidence showing what was agreed and what your business provided.
This could include emails, signed documents, photographs, delivery records or other communications.
Should I send a letter before action?
If ordinary attempts to obtain payment have failed, a formal letter before action may be appropriate.
This usually sets out the basis of the claim, the amount being sought and what will happen if payment is not received.
Court proceedings are subject to procedural rules, and there may be particular steps that should be followed before issuing a claim.
A carefully prepared letter may also encourage the customer to engage with the issue without proceedings becoming necessary.
Can my business claim interest?
Depending on the circumstances, your business may have a contractual or statutory right to claim interest on money that has not been paid on time.
For qualifying business-to-business debts, statutory rights concerning late commercial payments may also be relevant.
Whether these provisions apply, and what can be claimed, will depend upon the particular transaction and contractual arrangements.
Should I take the customer to court?
Court proceedings may be an option, but the decision should be considered commercially as well as legally.
Consider how much is outstanding, the strength of your evidence, the likely cost of pursuing the claim and whether the customer appears capable of paying.
It is also worth considering whether you want to preserve the commercial relationship.
In some circumstances, negotiation or another form of dispute resolution may produce a better commercial result than prolonged proceedings.
What happens if I win and they still don’t pay?
Obtaining a court judgment does not necessarily result in automatic payment.
If a debtor does not voluntarily satisfy a judgment, enforcement action may need to be considered.
The appropriate option will depend upon the circumstances and the debtor’s assets and financial position.
This is why it can be sensible to consider recoverability before spending significant amounts pursuing a claim.
Can I prevent this happening again?
Not every bad debt can be avoided, but good contractual arrangements and credit-control procedures can reduce the risk.
Make sure customers understand your payment terms before work begins.
Your terms and conditions should clearly address when invoices become due and what happens if payment is late.
Businesses should also have a consistent process for identifying and chasing overdue accounts rather than allowing unpaid invoices to accumulate.
How Penerley can help
Unpaid invoices can put unnecessary pressure on a business and take valuable time away from running it.
Penerley can advise businesses on debt recovery, contractual disputes and commercial disagreements, from initial correspondence through to proceedings where appropriate.
If your business is owed money and requests for payment are being ignored, contact Penerley to discuss the most appropriate way forward.
