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How Debt Collection Works for Small Businesses

For small businesses, late payments can be a serious – possibly even critical – threat to your ability to continue trading. According to research from GoCardless, 2 in 5 SME businesses have serious cash flow problems as a result of late payments, while 58% of SMEs think that late payments are putting their business at risk of failure. When attempting to settle the invoice amicably fails, you may need to begin the debt collection process. Find out everything you need to know about debt collection in the UK for small businesses with our helpful guide.

When is a payment considered to be late?

When it comes to debt collection, the first thing you need to know is what constitutes a late payment. This should be made clear in your invoice’s payment terms. Most businesses implement net 30 payment terms, meaning that the customer has up to 30 calendar days to pay the invoice. You may also have implemented longer payment terms, like net 45 or net 60, or shorter payment terms, like net 7.

If you didn’t include payment terms in your invoice, the government states that a payment can be considered late if it still hasn’t been paid 30 days after the customer received the invoice or 30 days after they received the goods/services (if this happens later). After this 30-day period has passed, there are a range of different debt collection options that your business can pursue to settle the invoice.

First steps in the debt collection process

If your business is dealing with a late payment, it’s important not to overreact. In many cases, a client will simply have forgotten to pay or their accounts payable team is dealing with a backlog. Often, a reminder letter, email, or phone call is all that’s necessary to prompt payment.

If, after a couple of attempts to get in touch, your business still hasn’t received payment for the invoice, you may need to send a debt collection letter, also referred to as a letter of demand. This is a much more serious step and should only be taken if your previous contact attempts have fallen on deaf ears.

If you send a debt collection letter and still don’t receive a response, it may be time to look into professional debt collection services. At this point, you can also start charging late payment interest on your invoice, which may encourage your customer to stump up the money.

Professional debt collection services

There are two key forms of professional debt collection:

  • Solicitors

  • Debt collection agencies

Most of the time, hiring a solicitor is likely to be the most cost-effective option. A debt collection letter with a legal letterhead is likely to be much more of a motivating factor for payment than a letter from your own firm. As a result, a letter from a law firm may be all that’s needed to prompt payment.

If that doesn’t work, it may be necessary to involve a debt collection company. Although debt collection services can be expensive, they’re often the most effective way to settle a late invoice, as your clients may be wary of a mark on their credit record or the threat of their company going bust.

If you do hire a debt collection agency, it will almost certainly lead to a permanent breakdown in your relationship with the customer. Plus, debt collection agencies can often be heavy-handed, and your business’s reputation may suffer as a result of the debt collection tactics that they employ.

Taking debt collection to court

The final step in the debt collection process is taking the matter to court. This should be considered a last resort as a judge will need to be satisfied that you’ve exhausted all your other options before litigation. There are several different steps to debt collection via court. First, you’ll need to make a County Court Claim, which is a claim for the unpaid invoice. Assuming that they don’t defend the debt (or that their defence is unsuccessful), you’ll receive a County Court Judgement, which is an enforceable court order requiring the debtor to pay the debt, interest, and costs. You should also apply for an order to wind up the company, which may be enough to convince the debtor to finally make payment.

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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.

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GoCardless Ltd., Sutton Yard, 65 Goswell Road, London, EC1V 7EN, United Kingdom

GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.