Debt recovery

Even with good credit management policies and procedures, it’s likely you’ll have to deal with bad debts. There are a several methods, with escalating degrees of severity, that you can use to recover these bad debts. It is advisable to use a measured approach and select the most appropriate method to recover the debt while maintaining the relationship with your client.

Essentially, an unpaid invoice is a breach of contract
Disputes arise when parties to a contract don’t do what they agreed - in this case – paying for products or services supplied.

You can learn more about the options available to resolve your contract dispute.

Generally, your debt collection options include:

1. Communication

Chase overdue invoices immediately.

Contact your client by phone or email the day after the invoice is due. This lets your client know that you keep close track of your accounts receivable. Sometimes invoices get lost or overlooked, so maintain positive relationships with your client and be polite and friendly.

Ask if the client is experiencing a short-term problem or if there’s a valid reason for not making the payment. Decide how valuable the client is to your business. You may be willing to temporarily extend their credit terms, or you might cancel the client’s credit agreement if late payments become a persistent problem.

2. Letter of demand

If communication and consultation with the client does not result in payment of the debt, you may decide to send a letter of demand.

Sample letter of demand (1-page Microsoft Word doc 27 KB)
You can download and modify this sample letter of demand to send to any debtor who has not paid by the due date.

A letter of demand gives your client the opportunity to pay the debt without spending the time and money associated with legal proceedings. Keep a copy of the letter of demand you send the client as it may be required as evidence that you tried to recover the debt if you proceed with legal action.

Either you or your lawyer can draft a letter of demand. Learn more about hiring a lawyer.

When drafting a letter of demand you must not harass the debtor or design it to look like a court document.

These debt collection practices are illegal. The ACCC website explains your legal obligations when recovering a debt.

The letter of demand should:

  • state details of the debt ( dates, agreements, amounts due, and days overdue)
  • include copies of applicable quotes or invoices
  • request that payment be made by a certain date
  • warn that debt recovery options will be pursued if payment is not received by the nominated date.

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Debt recovery options

In looking at your debt recovery options consider:

  • the real chances of recovery
  • the time taken away from your business in pursuing the debt
  • debt collector agency costs
  • the legal and court costs
  • whether costs will be recoverable from the debtor
  • the need to obtain legal advice.

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Hire a debt collector

A debt collector recovers payment on behalf of another person for outstanding debts that individuals or businesses are legally obliged to pay. Demands for payment can be made in writing, verbally over the telephone, or in person.

Debt collectors operating in Western Australia must be licensed under the Debt Collectors Licensing Act 1964 (WA).

Debt collection agencies charge a fee or percentage of the total amount collected. To find a reputable debt collector refer to the Yellow Pages or the Institute of Mercantile Agents Ltd that represents collectors, investigators, process servers and repossession agents throughout Australia.

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Legal proceedings

Be prepared to follow through with any warning about legal action in your letter of demand. Some legal proceedings may become complex and expensive.

Four different courts deal with civil matters that involve debt recovery disputes, depending on the amount of the debt:

What’s next.....

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Related Information

Top Tips

  1. Communication –
    chase overdue invoices immediately.

  2. Sample letter of demand (1-page Microsoft Word doc 27 KB)
    You can download and modify this sample letter of demand to send to any debtor who has not paid by the due date.

  3. Hire a debt collector.

  4. Legal proceedings.

  5. Call 13 12 49 or email us to speak with an SBDC adviser or to make an appointment.

SBDC small business briefs are summaries of essential information about a popular business topic. The business briefs related to this topic include:


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