Three steps for effective debt recovery
One of the most important aspects of running a profitable business is to ensure that you avoid bad debts. To do this it is crucial that you have a strong debt recovery system in place.
The three key steps to take to avoid bad debts, and to recover outstanding amounts more efficiently are:
- Establish a strong set of Business Terms and Conditions;
- Ensure the invoices you send to customers detail the key information in a clear manner and sets a short payment period; and
- If customers fail to pay within the set time, send a Letter of Demand.
This article will outline how you can do all three of these effectively, and thus have a strong debt recovery system integrated into your business.
1. Business Terms and Conditions
To ensure that you are paid promptly, it is crucial to develop a strong set of Business Terms and Conditions. Your terms and conditions should typically include:
- Description of products or services being provided;
- Your price payment options and requirements;
- Delivery options;
- Return/refund/exchange policy.
In particular, the following are important to emphasise in your Business Terms and Conditions for prompt payment.
Outline the scope of products or services
Depending on your business, you may have an order form which lists the goods and services the customer intends to purchase. This should include product/service descriptions and the terms and conditions of the sale. This will clearly demonstrate to the customer that a contractual agreement exists. Furthermore, this decreases the likelihood of disputes arising later, and may ensure you are paid promptly.
Make provision for accepting the Terms and Conditions
You should also make provision for the customer to accept your terms and conditions – it may not be sufficient to receive verbal confirmation that they accept the terms and conditions, because this may cause disputes or disagreements. Some suggested ways of proving acceptance are:
- Signing the Terms and Conditions page physically;
- If using a website, clicking ‘I accept’ on the Terms and Conditions section;
- Confirming through an email that the customer accepts the Terms and Conditions;
- Paying a deposit.
Payment methods and options
- Terms and Conditions that are well-drafted clearly communicate payment methods, requirements, and timeframes.
- You can allow for customers to pay in full upfront, or in instalments at regular intervals.
- If you opt for the latter, it would be effective to take a deposit. This could act as an incentive for customers to make payments on time, or otherwise risk forfeiting their deposit.
- Likewise, if customers choose to pay upfront, you may choose to offer a discount. This acts as an incentive for customers to pay outright, given the saving they make which they would not get paying by instalments.
- The Terms and Conditions should clearly state what the consequences are if a customer fails to pay for the product or service or misses a payment. Generally, these consequences would be:
- Ceasing to provide the goods or service;
- Charging interest on the unpaid amounts;
- Using a debt collection service to recover the unpaid amounts; or
- Initiating legal proceedings.
Once you have provided the goods or service, it is important that you provide the customer with an invoice that clearly sets out what goods and services were provided, and the amount owed. This sounds obvious but it is surprising how often this is not done properly. The actual invoice can be very important if legal proceedings are commenced.
The following details should be included in invoices to prevent customers disputing what they owe you, and delay making payments:
- Goods and services provided: Clearly list all the products or services that were provided to the customer.
- Payment due: Outline the costs of individual goods and services, taxes, delivery costs and other expenses. It may also be useful to mention any discounts that were provided. It would be more effective to use a cost-breakdown, as suggested here, as opposed to solely outlining the total payment due.
- Terms and Conditions: Refer the customer to your Business Terms and Conditions which set out your right to be paid, and the consequences customers face for not paying.
- Payment time: Clearly state the date on which payment for the goods or services provided is due. Generally, it may be more conducive to have shorter payment times, as this will help you more quickly identify if a customer is unlikely to pay.
It will also help to include a variety of payment options for customers to suit a variety of needs, like cash, direct debit, online payment platforms (like PayPal), Credit Card etc.
3. Letter of Demand
In some cases, despite having a strong set of Business Terms and Conditions and an effective invoicing system, there may still be delayed payments or disputes arising between you and the customer.
What should I do if there is a dispute about the good or service?
First you should ensure that you comply with the consumer guarantees that are enumerated in the Australian Consumer Law. These list the circumstances in which a refund, replacement or repair must be provided. If you are a retailer, you cannot refuse to help the customer by referring them to the manufacturer or importer.
Amongst other things, products must:
- Match descriptions and representations made by the salesperson/advertisements/packaging or labels;
- Match any demonstration model or sample;
- Be fit for purpose;
- Be of acceptable quality; and
- Meet promises made about performance, condition or quality, including lifetime guarantees.
Amongst other things, services must:
- Be provided with acceptable skill, care or technical knowledge; and
- Be delivered within a reasonable time where there is no set date.
What should I do if payment is not made?
If there is no payment made, you should try and take these preliminary steps:
- Contact the customer and provide them with a friendly reminder.
- Call the customer and provide them with an overdue payment reminder.
- Provide the customer with a final notice.
If the payment has not been made after this point, the next step is to do a Letter of Demand.
A Letter of Demand is a formal request for payment. This should generally be used as a last resort, as it could potentially damage business relations between yourself and the customer. Generally, this would contain:
- The amount that is owing;
- What goods or services that debt relates to;
- Evidence of the debt, including invoices, contracts, emails and the Business Terms and Conditions;
- Deadline for payment;
- Consequences if the payment is not made within this time-frame (which would be the intention to commence legal proceedings); and
- Payment options.
Letters of Demand can generally be drafted on your own, or with the assistance of a lawyer. A template on how a Letter of Demand should be drafted can be found on the Victorian Government’s Business webpage.
4. Court Proceedings
If you intend to initiate legal proceedings against the person you need to calculate how much you are owed, as this will determine which Court has jurisdiction over your matter.
If you are owed $100,000 or under, the Magistrates’ Court would have jurisdiction over your matter. As a creditor you would issue a Form 5A to start the proceedings in the Magistrates Court.
If you are owed over $100,000 the County Court would have jurisdiction to hear the matter. It is important to keep in mind that County Court matters can be time consuming and expensive. Depending on the facts VCAT can also be an option for debt recovery.
- Having a strong debt recovery system can save your business the stress of accruing bad debts.
- Ensure you keep records of all transactions and communications between yourself and your customers.
- Seek legal advice if you are unsure on what to do if a debtor repeatedly refuses to pay money owed you.
Lord Commercial Lawyers is a boutique commercial law firm based in the Melbourne CBD. We work with businesses and individuals to help them achieve their legal and commercial goals.
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