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How Your Business Can Recover Business Debts

Posted by Ryan M. Newburn | Jan 31, 2023 | 0 Comments

Business debt recovery is the process of pursuing companies or individuals that owe you money. Companies and business owners occasionally deal with clients that do not pay their invoices. Sometimes, debtors may disregard a business's efforts to collect the debt.

Not receiving payments for services or goods provided may severely impact your cash flow and overall business. In some situations, legal action may be required. However, before you get lawyers involved, there are many steps you can take to recover your business debts. Whether you pursue the debtor yourself, engage with a debt collection service company, or ultimately decide to pursue litigation, you should always familiarize yourself with your options. Contact our experienced business lawyers today to learn how we can help you recover your business debts.

Debt Recovery vs. Debt Collection

With one slight but crucial difference, the phrases debt recovery and debt collection are synonymous. Debt collection is a creditor's attempt to collect consumer loans and credit that a customer still needs to repay. Debt recovery is when a creditor engages a third party, a collection firm, to recover the money when a loan—such as a credit card balance—continues unpaid.

Why Managing Debts is Important

Managing commercial debts involves more than just attempting to recover money from uncooperative clients. When done correctly, business debt collection allows you to improve relations with your debtors and recover payments without resorting to frequently expensive litigation.

In business debt recovery, it is essential to understand how various forms of agreements and contracts with different terms and conditions help in collecting past-due payments. Experienced debt collection lawyers might be of assistance in this situation.

What law protects businesses?

Businesses are safeguarded by the Late Payment of Commercial Debts (Interest) Act of 1998. The Act grants individuals and companies the authority to pursue reimbursement, interest, and costs for unpaid debts in their capacity as a creditor. Additionally, it deters past-due payments. The owed money, interest, compensation, and expenses are all subject to collection by your business. You can file a lawsuit if your client does not pay any outstanding invoices or bills.

Best Practices in Debt Collection

Debt collection is a crucial part of any business. To avoid chasing un-paying clients or customers, always have billing processes set up to make sending invoices and follow-ups easy.

This can include taking the following steps:

  1. Create clear contracts, laying out the payment terms for the agreement.
  2. Collect bank account information or preferred payment methods at the outset of the agreement for goods or services.
  3. Review your invoice policy to ensure you send invoices frequently enough to support your operations.
  4. Review your invoice technology and adopt platforms that can make invoicing easier. Many businesses use Google Sheets or Excel templates to track payments owed. However, if you adopt a software or platform that can automatically keep track of everything, automatically send invoices, and send payment reminders, you are more likely to be able to track down debtors.
  5. Have an automated reminder policy in place for late invoices. This goes back to point #4, as many platforms can automatically send reminders for unpaid invoices.
  6. Make it easy for clients and customers to submit payments. Whether they get set up at the outset by inputting ACH details or they can easily input the card information, make it easy for them to pay.
  7. Make it clear from the outset how you will handle late client payments.
  8. Always be proactive about late payments. If you see a client consistently sending late payments, reach out to them to let them know they will be fined for additional late fees.

These are basic processes to implement from the outset to avoid intense debt collection proceedings when payments are extremely late.

Debt Recovery Process

Debt recovery is significant because it can dramatically impact:

  • Your business's revenue
  • Your business's profit and profit margin
  • How your business can operate on a day-to-day basis

When you have the processes listed above, recovering debt will be easier. However, only some have those processes in place. Therefore, when your business needs to recover a debt for late payment, understand what your tools are going forward for collecting that debt.

Analyzing Your Contracts

As mentioned, from the outset of engaging with a third party, you should always ensure you have a contract that lays out the terms and requirements of payments from the client or customer. These contracts should include the following:

  • The Term of the agreement
  • The Amount agreed upon for the service or good
  • When you will send an invoice or bill to the third-party
  • When payment is due
  • Whether there is a grace period
  • Whether there is a late fee for late payments
  • How you can pursue the third party in the event of a breach of the agreement (i.e., they failed to pay)

Once you've determined that a client or customer has missed a payment or is late on the payment, it will be crucial to refer back to the agreement on their obligations.

Sending Payment Reminders

Before getting a third-party debt collection service involved, start with automatic reminders sent to your clients or third-party purchasers. Typically, businesses can send:

  1. A friendly payment reminder
  2. An overdue payment reminder
  3. A final notice reminder

Depending on your relationship with your clients, you can add additional reminders to this step. For example, service-based businesses that consistently speak to the client and work with them on an ongoing basis may want to be less aggressive with their reminders in the note's tone. You also may want to state that you will only provide the service or goods once you receive the missing payment.

How often and the tone that you use in these reminders will depend entirely on the nature of your business and your relationship with your clients.

Making Direct Contact With The Debtor

If the debtor fails to make payment after each of these reminders, it is important that you, or a team member, try to contact the debtor, or someone at the debtor's company, directly. This can be via phone call, email, or even in person. If the customer or client is located close to you, you can visit them in person to get a response immediately. This could help build a relationship with the client or customer and show that you are willing to work things out before taking the next steps.

Sending a Formal Letter of Demand

If none of the attempts above have worked, consider sending a formal letter of demand. You should consult with an experienced attorney in drafting this letter before sending it. Remember that sending a letter of demand could potentially sour the relationship. However, if the outstanding invoice negatively impacts your operations, this could be a good option to ensure you receive the payment. Whether you plan on working with a debt collection agency or a lawyer, you should compare both costs and what each of the fees will cover in your debt collection processes. For example, you have to ask yourself, "If the unpaid debt is $500, is it worth it to hire a debt collection agency to recover that debt if the debt collection agency costs more?"

Using a Debt Collection Agency

If you do not receive a response from the Demand Letter, a good next step would be to bring in a professional debt collection agency's service before proceeding to litigation. However, it is crucial to note that legislation exists to regulate the debt collection process. These laws guarantee that consumers are protected from harassing debt recovery techniques because financial debt may be precarious. Therefore, when working with a debt collection agency, be sure that they understand the laws that may affect certain debt collection practices.

Legal Action

If the collection agency and you completed all steps to obtain the unpaid invoice or bill, consider taking legal action. You should send the client or customer a letter of your intent to pursue legal action before initiating any proceedings. In many cases, sending this letter will grab the client's attention to take this seriously. If the debtor does not attend the court proceeding, the court will likely automatically grant your motion or petition. A judge may issue a money judgment in court, which a creditor that is serious about collecting a debt might then seize and record a lien against the debtor's assets.


If you have any questions about how your business can recover debts, contact our legal team today for a free consultation to learn how we can help you.

About the Author

Ryan M. Newburn

Ryan Newburn is a business and legal expert trusted by Executive Teams and Boards of Directors to apply sound business principals to solve legal and financial problems. Ryan's practice focuses on mergers and acquisitions, financings, corporate formations and corporate governance in a broad range of industries including energy, distribution services, healthcare, medical devices, and technology. Leveraging his formal business training and years of practical experience, including as an executive at public and private companies, Ryan has advised hundreds of companies in dozens of industries of unique legal and financial issues.


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