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How Can a Small Business Collect a Debt?

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedOct 20212 min read

While large companies have sufficient cash flow to wait for late payments, non-paying customers can put a small business’s entire livelihood at risk. What can you do if a client hasn’t paid you on time? From friendly reminders to legal action, here’s the debt collection process for small businesses to follow.

Beginning the small business debt collection process

When does a late payment become a serious debt? The first thing to understand is how payment terms work. When you issue invoices for your business’s goods and services, they should clearly state the payment terms. Most small businesses will use net 30 terms, which means that the client has up to 30 calendar days to pay from the invoice’s date of issue. However, this can be adjusted to suit your cash flow needs. Some businesses will use net 7 terms, while others will use longer terms like net 45 or even net 60. You can’t begin the small business debt collection process until this due date has come and gone.

What is the debt collection process for small businesses?

What are your options when your business hasn’t been paid? It’s important to put a clearly defined procedure in place so you know what to do.

Here are a few key steps to follow when collecting debts for small businesses.

Verify your payment terms to see when the invoice was due
Contact your customer in writing to request the payment
Set up payment reminders to contact customer at regular intervals
Send a formal letter of demand for payment
Escalate your action to a debt collection service
Take legal action if warranted

For smaller debts, you might decide the hassle of escalation isn’t worth the time and cost. In this case, you can continue to simply send out automated reminders or write off the debt as a business expense.

Who can help with debt collecting for small businesses?

What can you do if the customer simply refuses to pay, and the debt is too big to ignore? There are several outlets you can turn to in Australia for help with debt collection.

The small business ombudsman is appointed by the government to assist with debt recovery and dispute resolution.
Community legal centres offer help with writing a formal letter of demand or determining whether to pursue further legal action.
Small claims tribunals can help you settle the debt outside of a formal courtroom setting, with dispute management and legal forms.
Lawyers help if the amount owed is too high to handle through a small claims tribunal. You’ll need to take the case to a higher court with more formal debt collection procedures.
Debt collection agencies offer another way to pursue the payment owed, but you can expect to pay a percentage of what’s recovered in agency fees.

Preventing issues with debt collection

Of course, one of the best ways to protect your business is to prevent bad debts in the first place. The Australian Securities and Investments Commission (ASIC) Registers allow you to check a company’s status before you do business with them. If the business is deregistered or in liquidation, there’s a higher chance that they’ll be unable to pay their bills. Performing these background checks only takes a moment, but it can save you the headache of debt collection later.

A few addition prevention practices include:

Offer discounts for early payments
Require prepayment for goods and services
Submit invoices as soon as services are provided
Provide a selection of easy payment options
Apply credit limits to customers

You can also blacklist customers with a history of late payments, as this indicates they struggle with finances and may be unable to pay future debts.

Debt collection software for small business

One of the easiest ways to streamline the whole process is by using debt collection software for small business. This allows you to automate your accounts receivable procedures and send out timely reminders for payment, without paying associated debt collection agency fees. The best debt collection software reduces overdue invoices and integrates with your existing accounting software.

The best platforms will process payments from customers, negotiate payment plans on your behalf, and send out automated payment reminders to keep clients notified of what’s owed.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.