What to do about an unpaid invoice?

Given the current economic situation in the UK and other developed economies, commercial debt is rising to unprecedented levels. It would seem that creditors, freelancers, and small and medium-sized businesses have to dedicate more and more resources each year chasing payment from indebted clients.

An unpaid invoice is very much like a sore on the surface of your financial health, if left unchecked and untreated it can quickly balloon out of proportion and burst. Establishing and securing cash flow is vital to avoiding bankruptcy, and dealing with the non-payment of an invoice should be given top priority.

This article sets out the options available to you to getting paid. There is no magic solution and there are pros and cons to each suggested remedy. On balance, my preferred choice is to register your invoice dispute with a service like www.disputesregister.org as this is probably the cheapest way to stimulate your customer into paying up and if they don't you have performed a public service by warning off other potential suppliers.

Why is debt collection so important?

There are many reasons to ensure that you have access to rapid dispute resolution, not the least of which is increasing productivity, as well as releasing tied up cash, regulating cash flow, improving income, and reducing the need for overdrafts or loans.

You have the right to be paid

As business owner, you have the right to set your very own payment terms, such as discounts for early payment.

However, according to UK law, unless you agree to a specific payment date, your customer has a default period of 30 days to pay from the moment he or she receives the invoice.

Unfortunately, in the UK, businesses with an annual turnover of less than one million pounds will wait an average of 72 days for the payment of an invoice. Companies with an annual turnover between one million and ten million pounds can expect to wait an average of 55 days for payment. Even the largest conglomerates suffer from the inconveniences of unpaid invoices, waiting, on average, 48 days.  In the UK, small and medium-sized business owners are owed a total of 44.6 billion pounds in late fees. 

In fact, this critical issue has become so prevalent that invoice finance companies have provided medium and small businesses across the UK with over 20 billion pounds of funding in the past year alone.

While the invoice finance sector can make available much-needed working capital so that businesses can more easily invest into expanding operations without having to worry about chasing payments, it is not a suitable solution for all businesses.

Dispute resolution

For some business owners, especially for those on the smaller end of the spectrum, dispute resolution is an option but it can become a nerve-wracking experience. A careful balance must be exercised between asserting your right to payment and maintaining, where possible, a cordial relationship with your customers. After all, you don’t want to alienate your customer who might give you future business.

You could consider using a dispute resolution service

So, what can you do, as a business owner, when the credit period has passed, and not a peep is heard from your customer regarding their payment? Well you have a number of options:

Send a Late Invoice Reminder

While some folk prefer to begin with an informal call, I strongly recommend sending your client a formal Late-Invoice Reminder letter. When writing such a notice, it is essential that the recipient understands precisely what is being claimed and that you provide them with all the necessary information they need to advance the payment process. Make the letter as clear and concise as possible. Within the first paragraph, you should make clear the reason for contacting your client and provide them with an account statement where the total amount of debt is specified. Attach any relevant invoices or receipts.

If it is in your contract, remind the customer about any applicable penalties, such as suspension of services, the application of late interest, or the initiation of legal proceedings

Debt Collection Agency

If you client does not respond to your Late Invoice Reminder, then consider using a reputable debt collect agency. 

Debt collectors can’t force a client to pay an unpaid invoice, but they can certainly simplify your involvement in the process and save you the hassle and headache of writing letters or making angry phone calls.

Most reputable debt collection firms work on a charge-on-collection system, meaning they will not charge your business until after they have finalised the process of collecting what you are owed.

While some debt collection agencies charge a flat fee upfront for collecting on a fixed number of outstanding accounts, most will charge your business a percentage, usually between 15% and 20%, of the total amount collected.

The most prominent advantage of using the services of a debt collection agency is that you can concentrate on your business while they do the dirty work. However, it is essential to clarify that debt collectors have no judicial authority and therefore, if a client refuses to pay outright, the agency cannot legally force them to do so. (You can find a directory of debt collection agencies here)

Judicial Proceedings

Under UK law, for sums under 5,000 pounds, there is a quick and straightforward small claims procedure ( www.gov.uk/make-court-claim-for-money) through the local county courts, for which the assistance of a solicitor is not mandatory. In Scotland, this procedure is the responsibility of the Sheriff’s Court.

For debts of between 5,000 and 25,000 pounds, it is necessary to go to the so-called County Court, while for debts over 25,000 pounds it will be necessary to go to the High Court.

For the start of these procedures, the assistance of a solicitor is highly recommended. 

Moreover, if your claim is upheld in court, you have the right to full reimbursement of court costs and of any additional expenses incurred during the procedure including solicitor fees.

It is also suggested that you offer the debtor a conciliatory agreement before initiating any legal proceeding. With this conciliatory attempt, English legislation aims to avoid the initiation of unnecessary procedures. Additionally, it should be noted that conciliatory attempts can often lead to a faster recovery of debt.

Make it public

A very cost effective method of motivating your client to pay or at least getting them back to the table to negotiate is to let the world know about the client being a bad payer. Services like Business Disputes Register (www.disputesregister.org), for a small fee, allow you to publish the details of your unpaid invoice on the internet. Any third party considering doing business with your customer is likely to discover your dispute when doing background checks. Your customer will immediately see that this is detrimental to his or her business and will in all likelyhood get in touch with you to remove the dispute.


Make them bankrupt

Finally, if all else fails, you can apply to make a company bankrupt if they owe you money. This is the nuclear option as you are very unlikely to get paid in full if you pursue this route. This is a complicated process and you will need a lawyer. See more details here.

Conclusion

Neither self-management of unpaid invoices, nor the externalisation of this process, nor the recourse of a judicial procedure, really offer results that compensate the expenditure of time and money that each one of them supposes.

No matter the size of your business, chasing payments is more than a mere inconvenience. The non-payment of invoices impact your company’s entire operational framework, from cash liquidity to payroll management. If you want your business to succeed, you must establish a robust set of strategies to avoid accumulating unpaid invoices in the first place. For example:

• Research potential clients thoroughly
• If possible request upfront payments
• Make your company’s payment protocol as convenient as possible
• If possible set up recurring invoices
• Learn to recognise when chasing payment will not be worth the trouble.