How to Manage Your Business Debtors Legally and Professionally

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Written by Guest | Last Updated November 1st, 2019
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Guest Post by Stewart Dunlop

Having business debtors — people who owe you money for goods or services they’ve already received — is a normal part of doing business.

It can, however, seriously harm your cashflow.

What if an invoice goes unpaid for months on end? That might be manageable normally, but what if several clients don’t pay their invoices at just the point in the year when you have a large annual expense to cover?

You need a plan in place so you can manage your business debtors both legally and professionally.
Here’s what you should do:

1. Check your client’s credit information before you begin

Don’t fall into the trap of offering the exact same payment terms to every client. It’s normally very sensible to adjust these based on how reliable (or not) a client is likely to be about paying.
Running a credit check is a good way to judge how trustworthy your client is.

Remember, it’s only legal to run a credit check if you have your client’s consent. You should let them know about the credit check and about any impact it might have on their credit rating.

If the credit check flags up problems, then you can choose how to proceed. You might decide not to work with that client at all — or you might ask for a larger up-front payment than you normally would.

2. Set your terms and conditions in writing

By having the appropriate legal forms in place, like a Sale of Goods agreement, you’ll be able to prove that your client was informed of the terms when they signed a contract with you.

Hopefully, you’ll never need to go as far as taking legal action, but if you do, then you want to be sure that your client can’t simply turn around and say (for instance) that they didn’t know when they needed to pay, or they didn’t realize there was a penalty for late payment.

3. Pursue unpaid invoices promptly

If you invoiced 31 days ago with a 30-day net and you’ve not heard anything from your client — let alone received payment — then you should pursue that invoice immediately.

You might be concerned that clients will feel harassed or even that you’ll look a bit desperate for money (never a great look), but the truth is that following up promptly marks you as a professional. It shows that you’re on top of the details – even if your client’s own systems are in disarray.

Prompt follow-ups mean that you can quickly resolve minor issues before they become huge problems. They also make it clear that you won’t let things slip through the cracks – clients who’ve been able to get away with paying late once might well try it again.

4. Be prepared to phone, not just email

You might feel reluctant to pick up the phone, especially if you feel awkward about asking for the money that you’re owed. If you’ve emailed and not received any response, make the call.

It’s easy for an email to go unnoticed (or at least unanswered) in a stuffed inbox, and it’s also very easy for a client to claim that they never received it, even if they did. Call and insist on speaking to them — especially if you’ve emailed more than once.

If your client owes money to several people, they’re likely to prioritize paying whoever’s actually asking them for it — even if it is only to get you to leave them alone!

5. Hire a lawyer to write to the client

Hopefully, you won’t need to go as far as this step but if your client keeps saying they’ll pay “soon” without committing to anything, or if they’ve promised you payment on a particular date that’s come and gone, it might be time to get a lawyer involved.

This doesn’t mean taking court action (at least, not at this stage). Instead, you can get the lawyer to write an official letter to your client.

Using a lawyer ensures that you are acting in full accordance with the law, and it might prompt your client to pay up because they’re afraid you’ll take further legal action.

Be aware, though, that if you get to this stage, it’s possible that the client won’t want to work with you again in the future.

6. Consider hiring a debt collection agency

There are lots of debt collection agencies out there that can chase debtors on your behalf. If you’re short on time (or patience) then this can be a good option, as they’ll handle letters, phone calls, and so on.

You normally won’t need to pay them unless (and until) they get the invoice paid. They’ll take a percentage at this point, which varies from agency to agency, and which tends to be higher for invoices that have been outstanding for a long time.

It’s legal to use a debt collection agency, but make sure you’re using a reputable firm that won’t use any dodgy tactics. Ideally, you want an agency that will be polite and professional, so that they don’t alienate your clients completely.

7. Treat going to court as a last resort

Do everything you can to avoid having to sue your client for the money. This is an expensive route, and there’s no guarantee you’ll get paid what you’re owed. If the client’s company has gone into liquidation, for instance, the debt will likely be stricken off by the court.

It’s unlikely to be worth going to court over a small debt because the fees will eat up the money you get paid. Save this option for a true last resort in the case of really large debts.

Managing business debtors can feel daunting, especially if you’re running a small business or startup and you’ve not had any training in accounting. Following these straightforward tips to keep things professional (and legal) while ensuring that your invoices get paid on time.

Stewart Dunlop is a content manager working with LegalZoom. He is a full-time content writer and part-time footballer.

 

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