Cash flow is the lifeblood of small business so one bad debt can have disastrous consequences. So how do you effectively, and if need be legally, chase a bad debt?
LawPath debt recovery specialist Damin Murdock says there’s a number of ways to prepare for, and pursue, a debt.
“I don’t think it’s unreasonable to consider everyone you send an invoice to is at risk of not paying you. Therefore, it’s cheap insurance for you to put into your contracts and on your tax invoices that you use credit watch service providers,” Damin said.
“This shows the recipient that you’ve already used a service that monitors bad debtors, and if they don’t pay you on time, they may end up on it.”
“Good businesses rely on their reputations, so being black-marked as a bad debtor can have serious consequences – a gentle reminder not to become one of those never hurts.”
Preparation is really crucial and there’s a number of ways to cover your business to stop getting into relationships with bad debtors.
The following are Damin’s top five ways to make sure you get paid on time and cover your own risk:
Have a clear contract (LawPath can get you started with a precedent template agreement) that lays out the payment terms and where possible, ask for an upfront payment so you have some sort of commitment from the customer prior to delivering the goods or services.
Conduct appropriate research on your customers – I recommend my clients conduct basic web searches first as this may uncover some nasty facts about a potential customer. I also refer my clients to several credit reporting agents who can prepare comprehensive credit checks both across Australia and worldwide. By conducting proper searches before doing business, this may save you from a lot of cash flow issues, credit interest charges and legal fees later on.
Make sure the contract is signed by both parties – It is all too often that I have to file legal proceedings based on verbal contracts and facts and circumstances. Not only does this result in higher legal fees, it also results in more risk because ultimately, you will be relying on your testimony or your employees testimony in Court.
Bill upfront or on very short terms to limit the risk – When my clients have a new customer, I regularly tell them to bill within the first 30 days and make sure the payment terms are 7 days. If you don’t get paid for your first invoice, immediately cease work and follow up with the invoice. In light of cash flow being so important to business, some clients often offer discounts for early or upfront payment of the tax invoices.
Know when to stop providing goods and services to poor payers – After you have been in business for a while, you’ll hear every excuse in the book. If your customer is waiting on “the big sale” before they pay you, it means your customer has probably been waiting on “the big sale” for many years and accordingly, will ultimately be a time waster.
But what happens when a customer or client just simply refuses to pay, despite polite requests to do so after terms have well and truly expired?
The path for legal debt recovery begins with a letter of demand which serves two purposes. It lets the debtor know you intend to take legal proceedings if they do not pay and provides them with all the relevant information relating to debt. This is important because if legal action does take place, this becomes evidence of your attempt to recover your debt and will increase your chances of recovering your legal costs against the defendant.
If the debtor still refuses to pay, you then look at formal legal action.
The first step is to issue legal proceedings in court or file an application with your local tribunal. Often times, claims which are filed in tribunals or in the lower courts are “no cost jurisdictions” and therefore lawyers may not be allowed to act or alternatively, legal fees may not be recoverable if you win and/or lose. The tribunals and lower courts also generally will have guides to provide assistance to those who do not have legal representation.
If your claim is for more than $10,000.00, as a general principal I recommend my clients engage a lawyer to either help with drafting the claim, or acting for them for the entire matter. You may be able to negotiate with a lawyer on a fixed price basis for small claims. This will give you a better understanding of whether it is worth hiring a lawyer or not;
Once you issue your claim, the claim will have to be served on the defendant and they then generally have 21 to 28 days to file their defence. If there is no defence filed within the appropriate time, you may be able to file for a default judgment immediately and get a judgment in your favour.
If a defence is filed, you will them be asked to attend court or the tribunal and arrange step-by-step procedures leading up to a file hearing. This includes processes such as exchanging documents and filing evidence;
After the procedural steps are finished, you have a hearing. If you win at hearing, you get a judgment which you can enforce, however, sometimes the enforcement procedures can be more costly and time consuming than the original legal proceedings.
Enforcement proceedings includes calling the defendant to court to find out about what assets and liabilities they own; issuing a writ of levy over their personal assets such as their motor vehicle; issuing a writ of possession to force the sale of a home; making an application to wind-up and liquidate a company; or issuing a bankruptcy notice so that a trustee in bankruptcy is appointed.
At the end of the day, even if you obtain a favourable judgment, enforcing that judgment can take a long time and the debtor may be able to file an application to pay in instalments.
“If the debtor is deemed to have the ability to pay the judgment debt, then you’ll get paid eventually, but the time and effort involved for small amounts can be counterproductive and even end up costing you money.”
“It’s far better to be prepared, do the research and act early to help prevent slow payers become non-payers,” Damin said.
“Unsure where to start? Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.”