As a small business owner, it can be stressful when a client doesn’t pay. You have your regular operations to juggle, but now with the added task of following up on tricky clients. In this article, we go over what to do after a client forgets or refuses to pay.
Note that different legislation may apply depending on your circumstances. Considering this, it’s best to get legal advice to minimise missing payments and avoid breaching debt collection laws under the Australian Consumer Law (ACL) and in some circumstances, the National Credit Code (NCC).
Take steps to prevent missed payments
Taking steps in your business to clarify your payment terms and reduce likelihood of missed payments can reduce the time and effort spent on following up on payments. There are a few simple steps, such as:
- Set clear and simple payment terms, including consequences for late/missing payments such as default interest. This will make it easier for the clients to understand how to pay, and it can deter tricky clients from avoiding payment.
- Invoice clients promptly and keep records of customer payments and communications. This makes managing and identifying late payments easier.
- For larger contracts, it may be worth checking clients’ credibility through the Australian Securities and Investments Commission (ASIC) before you sign them.
- Taking a deposit or payment upfront where possible, can help minimise your losses in the event of a client failing to pay.
- For large payments, you may want to consider having them provide a personal guarantee if it is a company.
Clear communications
If you notice a missing payment, check your contract/payment terms for the agreed payment deadline, owed amount, and any actions that you can take. You can send a reminder to the client in case it was an accident, referencing these details. Good communication helps your business’ reputation, and it can give you evidence in case of legal action later on.
Letter of demand and further action
If a reminder isn’t enough, you can send a letter of demand. Letters of demand include the amount owed, the payment deadline, and further consequences of missing payment, such as legal action. While it’s tempting to send a letter of demand to get debt recovery over and done with, it can also negatively impact business relations if sent too abruptly. It’s best to consult an experienced lawyer to help you draft one.
When you’re sending reminders and trying to recover the debt, make sure to abide by the ACL and NCC. Document communications and agreements with clients, and keep contact attempts professional and to a reasonable number. If the debt is large enough to warrant hiring a debt collector, make sure that the agency is licensed—their actions are an extension of you!
If nothing has worked to recover the debt, you can take legal action. Arbitration or mediation are often the preferred method due to lower costs compared to taking action in court. While you can file a claim in court for the worst case scenario, these methods are generally cheaper and less time intensive.
What next?
Managing missing payments on top of your regular operations can be extremely tough and confusing. By setting up clear procedures for payment and record-keeping, you can minimise missing payments and keep debt recovery simple.
For help with payment terms and pursuing missing payments, contact us for a free, no-obligation chat.
