Debt recovery for small business: a step by step guide to getting paid

Debt recovery for small business is the formal process you follow when a customer still hasn't paid after you've chased them. It usually moves through a final reminder, a letter before action, a debt collection agency or a county court claim, and, if needed, enforcement of a court judgment. Each step puts more pressure on the customer, so many debts are paid well before a case ever reaches court. Recovering a debt can feel daunting, but small businesses can handle most of the process themselves without a solicitor. This guide covers when to start debt recovery, each step of the process, how much it costs, when a statutory demand makes sense and what to do if a debt can't be recovered.

When should a small business start debt recovery?

A small business should start debt recovery once normal chasing has failed, usually when a customer has ignored a final reminder, stopped responding or broken a promise to pay. Before that point, reminders, phone calls and a payment plan are quicker, cheaper and better for the relationship. Our guide to chasing overdue invoices covers that earlier stage in detail. A business payment is legally late from the agreed due date or, if no date was agreed, 30 days after the customer receives the invoice or the goods or service. From then on, you can add statutory interest and a fixed recovery fee to what you're owed, and you can include both in any later claim. Time limits also apply. In England and Wales, you generally have six years to bring a court claim for an unpaid debt under a contract, and you can't usually make a statutory demand for a debt more than six years old. In practice, the sooner you act, the better your chances. A customer who is slow to pay today may be unable to pay at all in a few months' time.

What are the steps in the debt recovery process?

The debt recovery process follows a clear order, with each step giving your customer another chance to pay before you move on to the next.

1. Check the debt and send a final reminder

Before you start formal action, make sure the debt is clear cut. Check that the invoice is correct, that the work or goods were delivered as agreed and that your customer hasn't raised a dispute you haven't answered. Gather your contract, purchase order, delivery notes and copies of every reminder you've sent. Then send a final reminder that gives a firm deadline for payment and explains that you'll start formal debt recovery if it isn't met. This is often enough to get the invoice paid.

2. Send a letter before action

A letter before action, sometimes called a letter before claim, is a formal written warning that you'll take legal action if the debt isn't paid. Courts expect you to send one before you start a claim, and if you don't, the court can take this into account when deciding costs and interest. Your letter before action should include:

• The amount owed, including any statutory interest and fixed recovery fee you're adding.

• The invoice numbers and dates, and the details of the agreement the debt comes from.

• How you've calculated the total.

• A deadline for payment and how to pay.

• A clear statement that you'll start court proceedings if the debt isn't paid by the deadline.

How long you give the customer depends on who they are. If you're claiming from another company, the court expects a reasonable period to respond, which is 14 days in a straightforward case. If your customer is a sole trader or an individual, the Pre-Action Protocol for Debt Claims applies instead. You should include an information sheet, a reply form and a financial statement form with your letter, and give them 30 days to reply. Send the letter by a method that proves it was received, such as recorded delivery as well as email, and keep a copy.

3. Consider mediation

Mediation is when an independent person helps you and your customer reach an agreement without going to court. It works well where the customer disputes part of the debt or wants to pay but needs time, and it's usually much quicker and cheaper than a court case. Courts expect businesses to consider options like mediation before they start a claim. Refusing it without good reason, or ignoring an invitation to use it, can lead to extra costs later on, even if you win.

4. Use a debt collection agency

If your letter before action is ignored, a debt collection agency can take over recovery for you. Agencies contact your customer on your behalf, negotiate payment and can advise on whether the debt is worth taking to court. A letter from a third party is often enough to prompt payment from a customer who has ignored you. Debt collection agencies usually charge a commission on the money they recover, a fixed fee per debt, or a mix of the two. Some work on a no recovery, no fee basis. Compare a few before you choose one, and check how they'll contact your customer, since the way they chase reflects on your business. Membership of a trade body such as the Credit Services Association is a good sign that an agency follows an agreed code of practice.

5. Make a county court claim

If the debt is still unpaid, you can make a court claim for money online or by post. Most small businesses can claim online, as long as they know the exact amount they're owed and both sides have an address in England or Wales. Once your claim is issued, your customer usually has 14 days to respond after receiving it. This extends to 28 days if they formally acknowledge the claim and say they intend to defend it. Your customer can pay, admit the debt and offer to pay in instalments, or dispute it. If your customer doesn't respond, you can ask the court for judgment in default, which means the court orders them to pay without a hearing. If they dispute the claim, it will usually be allocated to the small claims track if it's worth £10,000 or less. For claims of £10,000 or less, you must attend a free mediation appointment arranged by the court, which lasts up to an hour by phone. If mediation doesn't settle it, the claim goes to a hearing.

A judgment from the county court is known as a county court judgment (CCJ). If your customer doesn't pay it in full within one month, it stays on the public register for six years and can seriously affect their credit rating, which is often enough to make a customer pay.

6. Enforce the judgment

A court judgment doesn't guarantee payment. If your customer still doesn't pay, you can ask the court to enforce the judgment. Each option carries its own court fee, and the main ones are:

• A warrant of control, which lets enforcement agents, sometimes called bailiffs, visit the business and take goods to sell.

• A third party debt order, which freezes money in the debtor's bank account so it can be used to pay you.

• A charging order, which secures the debt against land or property the debtor owns.

• An attachment of earnings order, which takes money from an individual's wages, so it's useful if you're owed money by a sole trader who also has a salaried job.

• An order to attend court for questioning, which makes the debtor, or an officer of a company, give information about their finances so you can choose the right enforcement option.

How much does debt recovery cost?

The cost of debt recovery depends on how far you need to go. A letter before action costs little more than your time, while a court claim and enforcement add court fees and, if you use one, a solicitor or agency's charges. The court fee for a money claim in England and Wales is based on the amount you're claiming, including interest.

Source: GOV.UK money claim fees

If you win, you can usually add the court fee to the amount the debtor has to pay. On the small claims track, each side normally pays its own legal costs, so a solicitor's fees for a smaller claim are unlikely to be recovered. This is one reason many small businesses handle smaller claims themselves. You can also add the extra amounts the law allows on late business payments. These are statutory interest of 8% plus the Bank of England base rate and a fixed recovery fee of £40, £70 or £100 for each invoice, depending on its size. Including these in your claim helps cover the cost of recovering the debt.

Can you use a statutory demand to recover a debt?

A statutory demand is a formal demand for payment that can lead to a company being wound up or an individual being made bankrupt. It's a serious step and is best kept for larger debts that aren't in dispute. To use one, a company must owe you more than £750, or an individual must owe more than £5,000. Your customer then has 21 days to pay or agree a way to pay. If they don't, you can apply to court to wind up the company or make the individual bankrupt.

A statutory demand isn't the right choice for a disputed debt, and using one to pressure a customer when you don't intend to follow through can be treated as an abuse of process. Winding up a customer also means their assets are shared among all their creditors, so you may get back only a small part of what you're owed. Take legal advice before you serve one.

What happens if a debt can't be recovered?

Some debts can't be recovered, most often because the customer has become insolvent. If a customer enters administration or liquidation, you can't usually carry on with court action against them. Instead, you submit a claim to the insolvency practitioner handling the case. As a trade supplier, you'll usually be an unsecured creditor, which means you're paid only after secured lenders and certain other creditors. Unsecured creditors often receive a small part of what they're owed, or nothing at all. Our guide to reducing the risk from customer insolvencies covers how to spot warning signs earlier.

If you're registered for value added tax (VAT) and you've already paid HMRC the VAT on an invoice that's never paid, you may be able to claim it back through VAT bad debt relief. The debt must have been unpaid for at least six months after it was due, and you must have written it off in your VAT accounts and moved it to a separate bad debt account. You need to claim within four years and six months of the later of the payment due date and the date of supply. Speak to your accountant about writing the debt off in your accounts as well.

Tips for a smoother debt recovery process

A few habits make debt recovery quicker and give you a stronger position if the case goes further:

• Keep detailed records of every invoice, reminder, call and agreement, because these are your evidence if the debt reaches court.

• Try to resolve the debt amicably before you take legal action, since a payment plan or a phone call is faster and cheaper than court.

• Stay professional in every message, even when a customer is avoiding you, because aggressive chasing can harm your reputation and your case.

• Act promptly at each stage, since the longer a debt is left, the harder it usually is to recover.

• Think about the relationship before each step, because a good customer going through a difficult patch may be worth keeping with a little flexibility.

The rules on how you can chase a debt are covered in our credit management compliance checklist.

Check a customer's credit before you take legal action

Before you spend money on a debt collection agency or a court claim, it's worth knowing whether your customer can actually pay. A court judgment is only useful if the business behind it has money or assets to recover. A company credit check from Capitalise shows a business's credit score, payment history, any existing CCJs and a suggested credit limit. If a customer already has several unpaid CCJs or a sharply falling score, you can decide whether court action is worth the cost or whether to move quickly before other creditors do. Running the same check on every new customer before you agree payment terms also helps you avoid unpaid debts in the first place. Run a company credit check with Capitalise today before you decide your next step.