Out-of-court settlement

What can you do if a customer refuses to pay an outstanding debt and you want to avoid the time and expense of court action? Tom Whitney weighs up the alternatives
According to research from the Better Payment Practice Group (BPPG), almost a third of UK firms went to court in 2005 to chase money owed by business customers.

However, the organisation argues that court action should always be a last resort. "Going to court can be an effective method of recovering money, but it can also be expensive, stressful and time-consuming," warns Stephen Alambritis, BPPG member and spokesman for the Federation of Small Businesses.

"Businesses can avoid court action by credit-checking new customers, agreeing terms of trade at the outset and invoicing promptly."

But what happens if such preventative measures fail and payment is long overdue?

Try negotiation

Unless you specify otherwise in your payment terms, debts are classed as overdue 30 days after an invoice is issued. If after this time a customer cannot or will not pay, contact them to find out why. They might have genuine reasons, for example, they might be waiting for payment from one of their customers.

If possible, negotiate a part payment from them and reschedule the remainder. Bear in mind that if they already have outstanding court judgments against them, are bankrupt or in liquidation - the debt may be irrecoverable.

You are entitled to claim interest on late payments. Legally, you are allowed to charge the Bank of England base rate (currently around 4.5 per cent) plus 8 per cent for each day an invoice is overdue.

Get serious

If you fail to reach a resolution, warn the debtor that you intend to start legal proceedings. "A solicitor's letter makes it clear you're serious," says Alambritis. "Many will pay up immediately because they'll probably want to avoid the cost, hassle and uncertainty of going to court as much as you do."

If they still don't pay, you can ask a solicitor to issue them with a Summary Clause for payment (which must be made within 21 days) if they're not disputing the sum and it is greater than £750.

If the debtor still doesn't pay up and you think they have sufficient money to do so, you can threaten to petition for their bankruptcy.

Debt-collection agencies and factoring

Alternatively, you could use a debt-collection agency, but check that it is registered with the Credit Services Association. When faced with the prospect of being pursued by a debt collector, many pay up straight away.

Another option is using a debt-factoring service provider. Factors will advance you up to 85 per cent of the value of each invoice before your customer pays and the remainder (less a charge) when full payment is received. Factors also act as credit controllers on your behalf and will chase customers for payment.