Step by step – a guide to managing debts

Whether you’re a small business owner or the Chief Financial officer of a major corporation, one fact remains: your customers need to pay you.

But maintaining positive cash flow can be a challenge for any business.

Payments for suppliers, wages, rent and other overheads don’t always match up with the funds you have coming into your business.

Cash flow management is a combination of sensible payment arrangements and effective debt recovery processes.

We know from first-hand experience that clearly stating the scope of work and price upfront can greatly reduce the likelihood of a dispute arising.

We also recognise that regular communication about outstanding debts helps ensure any payment issues are resolved quickly.

This Guide aims to help business owners, financial controllers and credit managers best manage and recover debts.

By familiarising yourself with your debt recovery options, you can effectively reign in overdue debts and maintain a healthy cash flow cycle.

Let’s fix it before it becomes a problem…

The stitch in time that saves nine…

Adopting a robust business approach to how you are paid for what you’ve done means that you give your business the best chance of not having to deal with bad payers on a regular basis.

You’ll need to apply that approach consistently across your business activities.

Remember – it’s not your fault

A lot of people worry about looking aggressive, unreasonable or even unsympathetic when it comes to chasing up late payments and/or including late payment penalties in their terms and conditions.

But remember that you’re entitled to be paid for what you’ve done.

Provided that your payment terms aren’t unfair or unreasonable and you’ve fulfilled your side of the bargain properly, you’re in the right.

You’re not there to bankroll or prop up someone else – especially when it comes at the expense of your own cash-flow position.

Tackling late payments

Bad payers are a big pain for any business

You happily trade with another business for years, only to find that difficulties in getting paid arise, without warning or obvious signs in many cases.

Almost every business has come across a bad payer; you send them the invoice, they stop replying to your emails or answering your calls and at best, you get empty promises of transfers in process or even the rather archaic ‘the cheque is in the post’ reply.

Chasing an unpaid invoice can often trigger unexpected questions, or challenges to your invoice, months after the work has been signed off – quite often as part of a deliberate delay tactic.

Meanwhile a good business relationship is often ruined by a breakdown in trust caused by the struggle to get paid on time.

Many businesses also find late payment has a snowball effect on their cashflow and financial commitments, resulting in stress, frustration and lost opportunities.

In the pages ahead, we’ll help you equip yourself with the best strategy and techniques to make late and bad payers an avoidable experience for your business.

But we’ll also show you what you can do to recover a debt when you are faced with a late payer.

Tick all the boxes

1. Make fair payment part of the bargain from the start and get creative

The starting point is always to ensure that you have payment terms agreed upfront and that these terms include the rights and entitlements that you want when it comes to handling late payments.

Don’t assume even after you’ve clarified payment terms that they will be set in stone.

Actually. Here’s where you might want to get a bit creative and incentivise your customers to pay you on time, or even ahead of your deadlines.

For example

• you might want to offer a discount on the invoiced amount for early payment
• you might want to require payment upfront, or a deposit on account
• you can set short payment terms for new customers (for example, payment within 7 or 14 days of delivery of the product/service) and then if that customer proves responsible and reliable, you could agree on a discretion for you to later extend those terms to something a little longer.
• You might choose to refuse cheques as a payment method and insist only on bank transfers. This usually means that you get your money quicker, you don’t have to deal with the administration of having received a cheque and taking it to the bank and of course that risk after all that, it might bounce and then you have to chase it.

You can find our suite of terms and conditions here

2. Be clear about what the customer is buying from you and what that entails.

If your agreement involves, for example, a number of hours worked or various components to be acquired and assembled or modified, ensure that this process is also clear within your written terms that you agree up-front.

Where relevant, make sure you record your time or hours spent on projects or production accurately and that you follow a similarly accurate approach when it comes to accounting and your procurement practices.

These commercially efficient steps, which you’re probably already doing if you’re running your business effectively, help to reduce the risk of your customer responding to your invoices with protracted queries about the hours you spent on the job, the reasonableness of the components that you acquired etc and whether, ultimately, your invoice reflects fair value.

You may not able able to avoid that conversation entirely on every occasion, but at least if or when it does arise, you should be able to politely and easily cut it short.

3. Spell out the late payment consequences

If your customer is another business and not a private consumer, you should be able to add late payment interest and compensation entitlements to your terms and conditions.

4. Create clear and easy to understand invoices

Your invoices should contain the right level of detail to be transparent about the work you’ve undertaken and to demonstrate that this is consistent with what was agreed between you and your customer.

5. Add VAT correctly so your customer knows what exactly they need to budget for

Getting the VAT element right on an invoice is important and it’s likely to save you hassle of having to deal with Revenue on a potential VAT inspection.

Up to the point where you obtain a VAT number, you are not allowed to charge or show VAT on your invoices.

Once you get your VAT number if you need to, it’s possible to reissue those invoices showing the VAT.

6. Invoice the correct trading party

If you don’t address the invoice to the right business or person, they may actually be able to wriggle out of paying it or at least delay their payment obligations to you quite considerably.

It should be the same entity that signed up to your terms and conditions (unless you explicitly agreed otherwise).

It is vital that you understand your customer’s business model. Are they a limited company, sole trader or a partnership?

This information is necessary as it will determine who is legally responsible for your invoice i.e. an individual or a company.

7. Remove credit terms for persistent non-payers

If you have debtors who persistently pay you late, consider reducing or removing any credit limit that you otherwise agreed with them.

You should include your entitlement to do this in your terms and conditions from the outset.

Spending time on credit control can be frustrating, but it’s something that is really important for your business since ultimately, getting paid is one of the main objectives for being in business!

8. Include payment deadlines in your payment terms

However, there is no need in practice for you to insist on a 30-day payment window before you invoice.

Generally, the sooner you invoice, the sooner you get paid.

If you include your bank details on your invoices, you may be paid sooner as you don’t have to wait for cheques to be sent and then cleared; there is then also no excuse for your customer not having the right payment details to hand.

Payment Terms

What should you include in your business terms and conditions?

Any customer that engages you to provide goods or services should receive a written copy of your business terms and conditions.

Attach a copy of your business terms to each order form, quote and reference.

You can find our suite of terms and conditions templates here

So, you’ve done your homework and you’re well-prepared with robust terms and conditions.

But in spite of your efforts, you encounter a late payer.

The guidance ahead talks you through some simple but essential steps on how to avoid a late payer turning into a bad payer meaning someone who never ends up paying you and, quite possibly, putting your business at risk.

Take a look at our guide to getting paid to find out more

10 steps to take to recover a debt

1. Keep up your communication with the customer and keep it friendly but firm
2. Have a clear policy and process for handling late payments – to include the prompt sending of reminder letters on overdue accounts
3. Don’t delay if your reminder calls and/or letters fail to get the right response. Do be prepared to pick up the phone
4. Add late payment charges and interest on business-to-business debt and keep a proper account of these charges.
5. Make sure that late payments don’t turn into bad debts (never getting paid). For example, don’t continue to supply goods or services if payments are not being made – put a halt on things fast (always make sure you follow your contract terms on this).
6. If all else fails, send what’s called a ‘letter before action’ or ‘demand letter’ – essentially a letter pointing out that if payment is not made immediately, you will have no choice but to take legal action. Weigh up taking legal advice and consider whether you’re prepared to go to court.
7. If the debtor still doesn’t pay, you may serve a statement of claim on the debtor. This action starts the process to pursue your debt in court
8. The debtor may either:

• Respond to your claim by filing a defence or attempting to negotiate a settlement; or
• Not respond at all. You can then make an application to the court for a default judgment. A default judgment is an application to the court to have the matter finalised.

9. Always remain open to negotiating with the debtor. When preparing your claim for court, your lawyer will usually engage in negotiations with the debtor to resolve the matter out of court. This will save you and the debtor time and money.
10. The court will decide whether the debtor must pay you and award a judgment. You may need to take additional steps to collect your money.

How to pursue an unpaid debt

To help you pursue an unpaid debt we have a suite of letters to help you.

Most businesses want to preserve good relationships with their customers, even if something goes wrong on one occasion; and so our suite of complaint letters are considerately designed to help you make your point about the overdue payment, while making it clear that you are not a pushover.

 If you decide that it’s worthwhile to pursue a debt, the first step is to send a letter requesting that the debtor pay the outstanding amount.

You should use this letter at the start of any correspondence with another business that owes you money.

You can find our first template letter here

What happens next depends on the debtor’s response.

We’ve set out three possible options.

1. The debtor doesn’t respond

If the debtor doesn’t respond you should send a second chasing letter, giving your debtor additional time.

You can use our second chasing letter template for this.

If this second letter goes unanswered you may want to consider sending one further chasing letter.

This is generally the final chasing letter.

It is not prepared as a letter before action (the formal letter that initiates a formal legal process), which would normally follow this stage.

See our final chasing letter template

If there is still no reply, you then need to consider sending a letter before action, which we discuss latter.

2. The debtor acknowledges the debt but can’t pay

A good option here is to try and negotiate a commercial settlement with your debtor.

For example, you can offer the client one-off payment terms that are agreeable to you to try and settle the debt.

Your proposal may allow for payment of the debt in instalments or perhaps even a reduced lump sum payment.

You can use our letter offering agreeable payment terms to do this.

The debtor in turn may write to you with a proposal.

This may or may not be agreeable to you.

If the proposal is acceptable, you should use our letter accepting a proposal template

This letter is not a legally binding agreement on you.

This is because an agreement to accept a proposal to pay a debt that is already due is not legally binding unless it is supported with some other new terms.

If both of you agree to these alternative payment terms, then you could provide a debtor with a letter stating that the payment terms are in full and final settlement of the dispute.

But our advice it that you don’t provide such a letter unless you are comfortable doing so.

If you want to provide such a letter, use our letter of agreement to revised payment terms.

If the proposal is not agreeable you could write to the debtor with a counter proposal that is agreeable.

You can use our counter-proposal letter template for this.

This template allows you to insist on payment being made on the initial terms (failing which you will take the necessary actions to enforce payment) or, alternatively, to offer the customer one-off payment terms that are agreeable to you.

Some key points to remember when negotiating with your debtor are set out below.

Gather information about your debtor’s financial position

For example, you could conduct a credit check to see if they have a history of bad debts. This can be done through organisations like solocheck.ie or Experian which offer a range of searches so that you can piece together the debtor’s assets and financial position.

Remain professional

A debtor is unlikely to respond to angry letters and this type of conduct may reduce your chances of getting paid.

Be open to counter offers

You should always consider a reasonable, realistic offer of repayment. Another option is to accept a discounted amount of the debt owing. This is a sensible approach if there is a genuine dispute over the debt, for example, the quality of your goods and services.

Know your minimum acceptable offer

This may be a discounted amount, or instalments. But be realistic and ensure that the debt is paid within a reasonable timeframe.

Put your debtor on notice about the next steps

Let your debtor know if you intend to engage a debt collection agency or commence legal proceedings and when this will occur.

Document any agreement

Any agreement that you reach with your debtor should be written down. This can help avoid any further disputes about the debt.

3. The debtor denies the debt is owed

A debtor will usually set out the reasons why they believe they don’t owe the outstanding amount.

If you do not agree with the debtor’s reasons you should reply, setting out your position.

You may find our letter in reply from client that payment is not yet due useful.

Alternatively, you may want to consider court proceedings or instructing a debt collection agency.

Taking Legal Action

Starting court proceedings is often the last step in recovering a debt, as litigation can be complex and expensive.

There are several ways to recover a debt and the path you choose will depend on your business’ circumstances.

Although it may be very frustrating to walk away from a bad debt or from a customer whose business you really like, the reality is that sometimes it is better to walk away than to take the path of legal action.

Never tread this course lightly.

Before making a final decision, you should consider:

• the size of the debt compared with the costs involved in pursuing the debt;
• the debtor’s financial circumstances and the likelihood of paying the debt;
• the time you will need to spend away from your business in pursuing the debt;
• the value of your business relationship with your debtor;
• the financial impact on your business if you don’t pursue the debt.

Is your debt worth pursuing in court?

The cost of legal proceedings can easily exceed the debt   amount.

So  it’s important to maintain a commercial perspective when deciding what, if any, action you should take.

Some common costs in initiating legal proceedings include:

• your lawyer’s costs;
• court filing fees (this is the fee to start proceedings in court); and
• service costs (this is the cost of engaging a licensed process server to personally serve your court documents o the other party).

Can you prove your claim?

Gathering the following information can help support your claim against the debtor:

• written documents setting out the parties’ obligations;
• copies of invoices;
• details of when and how you provided the goods or services and have requested payment; and
• any correspondence from your debtor promising to make payment.

By doing so, it will be easier to establish the terms and conditions of the transaction, the amount the debtor agreed to pay and the work or services you agreed to perform.

Can the debtor pay?

There is little point pursuing a debtor if they have no way to pay the debt.

Undertaking due diligence before escalating your matter to court can help you get a better idea of the debtor’s financial status, assets or business performance.

You want to avoid wasting valuable time chasing a debtor who can’t repay you.

If you decide to go to court, ensure that you send a letter before action letter to the customer.

You should have previously sent our chaser letters to the debtor advising them of the monies owing.

Without sending this letter, and if you decide to initiate legal proceedings, the court may find that you have acted unreasonably and may penalise you by disallowing or reducing the costs or interest that you might otherwise have been entitled to.

You’ll find our letter before action template here

To find out how to pursue a debt through the District Court read our guide on how to recover a debt (coming soon)

Final Word

Managing cash flow is crucial for any business.

There are many steps you can take to ensure that your customers pay you on time, including clear payment terms and prompt invoicing.

The most important strategy is to maintain open communication with your customers.

If this doesn’t work, then you may consider issuing a letter before action or, if the debtor still doesn’t pay, pursuing your debt in court.

While the debt recovery process can seem daunting, you can take steps to ensure that you approach debt recovery sensibly and with a commercial outlook to get results.

For more guidance on managing debt check out our guides on chasing late payments and claiming late payment interest

You may also find our Debt Management Checklist useful. 

If you prefer to communicate with your customers by email then check out our guide to email templates for late payments