Tax & admin · 31 October 2016

An effective guide to tackling unpaid invoices

unpaid invoices
Getting paid for the work you have already done is one of the most important tasks you should be undertaking in your business

Solicitor David Walker begins his second series for Business Advice, covering everything a small business owner needs to know about dispute resolution. Part one takes a look at how to effectively recover late payments and unpaid invoices.

We don’t have a late payment problem in this country. We don’t need a small business commissioner and we certainly don’t need any more legislation, because recovering an unpaid invoice is actually quite simple.

Now, before I receive a raft of complaints from those of you who have suffered the consequences of countless unpaid invoices, let me explain what I mean.

As a solicitor, I see time and time again family businesses forced to close and the hopes and dreams of entrepreneurs shattered when they run out of money – so I’m not denying the devastating effects that slow-paying clients can have on a business.

However, in the vast majority of the cases that I see, the business owner themselves could and should have done far more to limit the damage being caused. It’s not that they don’t know what to do to recover an unpaid invoice, it’s usually a case of them not wanting to do it. I will explain the two main reasons for this later.

The first step to recovering an unpaid invoice is taking 100 per cent of the responsibility for it. As a director of a company, you have a legal duty to act in its best interests. If you’re not doing everything you can to get paid for the work that has already been done, you’re not fulfilling that duty. You’re therefore not taking proper care of your staff and everyone else who is relying on you.

People say I’m harsh when I give this advice, but I give it with the best of intentions because I want your business to be the huge success it deserves to be.

So, what do you do next?

The next step is to have an effective credit control system in place, and here I really stress the word “effective”. Each stage of your credit control process must take you a step closer to being paid, eliminating any excuses your client has for not paying and increasing the severity of the warnings you give.

Credit control must also be a priority. Not having time to chase unpaid invoices is not an excuse I’m prepared to accept. You must make time. Getting paid for the work you have already done is one of the most important tasks you should be undertaking in your business.

Preferably, schedule some time each week for credit control and if you really don’t have time, outsource the whole process to a specialist.

If you threaten legal action and your client still doesn’t pay, you must follow through. If you don’t, you will look weak and the chances of you being paid will be greatly reduced.

Now, I can hear what you’re saying:

“I can’t possibly take my client to court, that would be terrible for the relationship and I’ll never get any work out of them again.”

This is the first objection I always hear and I accept that it’s a risk, but think of it this way. It’s not you putting the relationship at risk, it’s your client. You’ve fulfilled your part of the bargain – they’re the one at fault by not paying you when they agreed to.

When it comes to legal action, you have two options.

Statutory demand

If you are owed more than £750 by a company, or £5,000 by an individual, and the debt is undisputed, your first option is to issue a statutory demand. This is quick and easy. There is just one form to complete and no fees to pay. It’s very effective because it’s the first step to winding up a company or making someone bankrupt and if your client is running a profitable business, then they won’t want this to happen.

Legal action

If you are claiming less than the amounts required to issue a statutory demand, or your debt is disputed, you will need to take the second option of starting legal action through the courts.

If you’re claiming less than £10,000, which is probably the case for the vast majority of unpaid invoices, the courts will class it as a small claim. The court rules for small claims are simplified to make the whole process quicker and easier to follow, so you should be able to represent yourself without needing a lawyer. In the next article in this series I will explain the four things you need to prove to a judge to win your case without a lawyer.

The second objection I hear about starting legal action comes from the fear people have about standing up in court and arguing their case in front of a judge. If you are thinking this, don’t worry.

Going to court is nowhere near as bad as it seems. Also, the chances of you actually getting there are very low. Of all cases, 97 per cent will settle before getting to trial, and I find that the more prepared you are to go to court, the less likely you will be to get there.

Enforcement

The final stage of recovering unpaid invoices is enforcement.

In the rare circumstances that you go to court, win and your client still doesn’t pay, you need to start enforcement action against them. This is the stage where many people give up, which is a shame because you’re so close to getting paid.

The most effective way of enforcing a judgement is instructing bailiffs to go and seize items of your client’s property to be sold. The proceeds are then used to repay your debts.

So, as you can see, recovering unpaid invoices is actually quite simple. The question is whether you are prepared to do what’s necessary to recover it. If you are, and you need any support to recover your unpaid invoices, please ask a question beneath this article. I have plenty of free resources that I would be happy to send you to help you through this process.

Read on to find out how to resolve a breach of contract.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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