If you have provided goods or services to another business, then you will likely have certain expectations or contractual clauses dictating when payment is due.
Despite its widespread use, this payment model can leave your business with severely constrained cash flows if payments are delayed or not made at all.
This reduction in cash flow can then hinder your ability to pay suppliers, invest in new projects, or even cover day-to-day expenses. When debts remain unpaid for extended periods, they can lead to a domino effect of financial difficulties.
The longer the payment is delayed, the greater the risk of the debt becoming bad or doubtful. Bad debts must be written off, directly affecting your profit margins.
Additionally, the administrative burden of chasing overdue payments can consume resources and time that could otherwise be devoted to more productive activities.
When informal discussion and negotiation fail, you may need to turn to legal proceedings to recover outstanding debts and give your cash flow a much-needed boost.
Legal avenues for debt recovery
If you find that you need to approach debtors through legal action to recoup debts, then you should consider using the following as a framework:
Initial contact
The first step should always involve reaching out to the debtor with a reminder of the outstanding amount. This can be a friendly reminder sent out shortly after the due date has passed.
However, if there’s no response, follow up with a more formal demand letter stating the amount owed and indicating the possible consequences of non-payment, such as legal action.
Interest
Under the law, businesses have the right to charge interest on late payments.
The Late Payment of Commercial Debts (Interest) Act 1998 allows you to charge statutory interest, which is eight per cent above the Bank of England base rate, on invoices that are paid late, as well as compensation for recovery costs.
Alternative Dispute Resolution
Before proceeding to the Court, consider alternative dispute resolution methods such as mediation or arbitration. You may be expected to have done this before formal court proceedings.
These processes involve a neutral third party who helps both sides reach a settlement through:
They are generally quicker, less formal, and cheaper than court proceedings.
Taking legal action
If other methods fail, you may need to initiate formal legal proceedings. The route you take will depend on the amount owed:
In either case, it’s advisable to consult with a solicitor who specialises in debt recovery to ensure that you are taking the correct legal steps and that all documentation is properly prepared.
Winding-up petitions
As a last resort, if the exceeds £750, you can issue a winding-up petition.
This is a serious step, indicating to the court that you believe the company is unable to pay its debts and should be liquidated.
We advise any business struggling to receive outstanding payments to seek legal advice if the issue is ongoing, but particularly if you are considering taking legal action through the Courts or submitting a winding-up petition.
For advice on debt recovery and financial disputes with another business, contact our expert team today to discuss your needs.
