You’ve sent your invoice. It is now overdue. It’s time to make The Call: “Regarding the invoice I sent a month ago, it’s now overdue. When do you think that will come through? … The cheque’s in the mail you say?” I encourage you to scream along with me.
While some of us would be content to keep working for this customer in the hope that somewhere along the line the money will magically land in your account—and yes, sometimes this does happen—I would suggest that you become assertive about late payment as soon as politely possible. This does two things: lets them know you are running a business, not a charity, and helps tame your cash flow which, after all, is the lifeblood of sustaining a business.
Here are three steps you can take to ensure your debtor knows you are serious about recovering what you’re owed.
Alternative dispute resolution
Once you have exhausted all the steps that most people would consider ‘polite chasing’—this includes communicating face-to-face with your customer, and suggesting other payment options such as by installment—then it’s time to bring in the little guns: alternative dispute resolution.
Use alternative dispute resolution if you:
- Have a strong case;
- Want an independent, neutral party to preside over the situation; and/or
- Want to avoid the high costs of going to court.
The two main non-legal avenues under the umbrella of alternative dispute resolution are mediation and arbitration.
Mediation involves an independent and neutral third party presiding over the case. A mediator will facilitate discussion between you and your debtor and assist in the negotiation process. This re-establishes any communication breakdown either party may have about the situation.
In many cases, it is not just an issue of one party not being paid: that is generally quite straightforward to resolve. Often, mediation will assist in those cases where there is a misunderstanding about the element of your work contract. For example, your client may have given you a brief, which you fulfilled, but then they wanted additional out-of-scope changes, which you charged for accordingly but they didn’t realise cost more. Mediation will allow the parties to work through different aspects of the relationship and the requisite payment involved.
If the mediation is successful, you and your debtor—that is, not the mediator—will reach a joint decision, which you will both agree to undertake. The mediator in this case is a facilitator for the discussion. This decision is not binding.
Arbitration is akin to mediation in its process, except the arbitrator makes the decision, not the parties, and the decision of the arbitrator is binding.
The main benefits of alternative dispute resolution are that you are able to better understand your client and the issue, without the discussion getting nasty. Rather than adopting prosecution/defendant roles, which positions each party against one another, alternative dispute resolution allows the parties to work together to reach a solution that both find mutually appropriate. There’s also no reason why you can’t continue the business relationship following resolution—most businesses do.
Alternative dispute resolution doesn’t work in situations where neither of the parties involved are willing to compromise, nor where communication is not a strong point. Sometimes the manner in which individual mediators or arbitrators handle disputes may also have a bearing on whether this form of reconciliation works.
Litigation is not the only legal avenue available to you if you’d like to chase payment: sometimes the threat of legal action—if your client knows you’re serious enough to go all the way—is enough to incentivise prompt payment.
To do things properly, start with a letter of demand. If your polite calls and reminders have gone nowhere, issue a letter of demand, which is a written statement outlining:
- The relationship you have with the debtor (e.g. you provided them with goods/services);
- The amount due to you; and
- A description of further action to be taken if the amount is not paid by a certain date.
If possible, add further details of the transaction such as dates or copies of the order/commission, the invoice, and the reminders. Keep a copy of the letter for your records and ensure the debtor receives it, for example via personal delivery or via registered post. The key here is records; you need everything in black and white and you need to let them know you have everything in black and white to show them you are serious about the issue.
A letter of demand is basically a warning of legal proceedings that may take place if the debt is not paid; it also gives the recipient an additional opportunity to pay. Its intent should be to allow the debtor one more chance to pay the debt to avoid legal proceedings, while also providing you with a paper trail should litigation eventuate.
Through a letter of demand you can also make substantiated warnings of other types of proceedings, such as registering the unpaid debt with a credit reporting bureau. Use wording such as: “Unless this invoice is paid in full within 7 days, we will have no alternative but to register your company on CreditorWatch, Australia’s online credit reporting agency. It is common practice for banks, utilities and other businesses to monitor CreditorWatch. A default against your business could lead to frozen accounts and difficulties in obtaining credit in the future.” This ensures the warning is both legal and non-threatening.
You do not need a lawyer or legal expert to draft a letter of demand so long as it has all the elements outlined above, which makes it admissible as evidence of the relationship and transaction history should it be required. If you are not confident of your ability to issue a letter of demand, however, it may be worthwhile to hire a legal professional; sometimes it’s amazing what a demand on a legal letterhead can do to suddenly free up a debtor’s money.
If the letter of demand, and any form of alternative dispute resolution you may have undergone, have not resulted in the debtor paying up, the final—and most expensive—step is to take the dispute to court.
There are two main courts that preside over commercial disputes: the Small Claims Court or Tribunal, and the Commercial Court in your State or Territory.
If the outstanding debt is below a certain amount (the amount differs in each state/territory but is generally between $6,000–$10,000) this is a Small Claims case, and the sitting fee is lower.
Small Claims involve some paperwork where you (the plaintiff) must make a Statement of Claim and serve it to the debtor (the defendant). If your debtor does not offer defence, you can apply to the court for a default judgement. If your debtor does mount a defence, the process will then go to a pre-trial review where both parties have a chance to ‘settle out of court’. If this doesn’t work, the case will go to a hearing where the court will make a judgement that is legally binding.
If your debtor still doesn’t pay, you can legally enforce the judgement. Actions include:
Garnishment: Where you can apply to obtain money from the debtor’s bank account or wages.
Writ for Levy of Property: Where you can apply for a Sheriff to seize and sell some of the debtor’s property.
Winding up: Where you can apply for a court order for the assets of a debtor company to be sold to pay the debt.
Bankruptcy: Where you can apply for a court order that allows you control of a debtor’s financial affairs to a trustee. The trustee can then use some of the debtor’s assets to pay the debt.
For higher debts, there is a Commercial Court in each State and Territory that will hear the case. The basic steps of the litigation procedure are pretty much the same, however you are more than likely to want professional legal representation, and the costs add up. Make sure your representative has all the documents required to mount the case, including the letter of demand.
The main advantage of litigation is that if you win, you can legally enforce the judgement and recover the debt. The drawback is the expense of doing so and the cost, not just money but time, effort and opportunity cost. You are also unlikely to resume business with this debtor.
Without payment you would not have a business so don’t shy away from claiming money that’s rightfully yours. Whichever method you choose, good luck.
About the author:
Colin Porter is the Founder and Managing Director of CreditorWatch, a credit reporting agency with over 40,000 clients across Australia. CreditorWatch provides credit reports, debtor monitoring and debt collections tools. For more information visit www.creditorwatch.com.au