What if your customer won't pay? A lawyer's guide for small business owners

Most payment disputes can be avoided with a clear invoicing process or resolved with a gentle reminder – but what can you do if your customer simply won’t pay?

In this expert guide, founder and Chairman of LawBite, Clive Rich, and barrister Belinda Naiken-Payne explain the legal recourse open to small business owners when all other options have been exhausted.

Deciding to take legal action on an unpaid invoice

As a small business owner, taking legal action against a non-paying customer can be a daunting prospect, but you shouldn’t be put off – you deserve to be paid for all of the work you do.

You may be able to recover a debt without going to court if it’s a trade debt with little dispute of fact or evidence, but you may occasionally be left with no other option than to escalate the situation and take legal action.

Depending on the value of the claim, the first thing you have to do is choose which court to start proceedings in. It’s important to choose the correct court and this can vary depending on where you live:

England and Wales

In England and Wales, there are different financial limits for claims in different courts, such as the County Court and the High Court (which is very expensive and involves complex procedures).

Scotland

In Scotland, you can make a claim with a value of up to £5,000 using the Simple Procedure via a Sheriff Court. The remainder of this article refers to the system in England and Wales, but if you're looking for more information on recovering bad debts in Scotland, take a look at the Scottish Courts and Tribunals website or, for advice on settling out of court, get in touch with Citizens Advice Scotland.

Northern Ireland

In Northern Ireland, if the claim does not exceed £3,000 you can make a claim online at the Courts and Tribunals Service website using the Small Claims Online service. The remainder of this article refers to the system in England and Wales, but you can find out more about chasing payment in Northern Ireland in this guide to recovering debts owed to you.

Starting legal proceedings

Doing it yourself

As long as the value of the claim is less than £10,000, you may be able to submit a small claim which will be allocated to the small claims track. The small claims track is a simplified procedural system for dealing with lower-value claims designed to be less formal and more accessible to litigants in person. A small claim can be made either online or through the County Court. The fast track applies for claims with a value between £10,000 and £25,000. It also applies in the County Court and once again the procedures are fairly simple.

Making a claim online

As an alternative to issuing proceedings in court, claims for specified sums can be issued at Money Claim Online (MCOL) - HM Courts & Tribunals Service’s internet-based service for claimants and defendants. This can be used for debts of up to £100,000. After submitting a claim and paying a fee you can review the progress of your claim online. Defendants are also given the opportunity to respond.

Making a claim in court

If you decide to go to court to make a small claim then you can represent yourself in person, as opposed to having a barrister or solicitor represent you. If both you, the claimant, and the defendant have agreed to mediation, the claim will be referred to the Small Claims Mediation service. This will help you to achieve a mutually agreeable settlement.

Using a debt collection agency

You could also choose to refer the matter to a debt collection agency to recover the money. These agencies will work with you to find flexible ways to resolve your outstanding balances. They usually charge a percentage of what you recover as a commission.

Debt collection might not have the best public image, but there are some reputable agencies out there. Just make sure that you carry out the necessary research before deciding which agency to use and be aware of the fees that they may charge (frequently around 10% of the debt). Many reputable agencies are members of the Credit Services Association.

Debt recovery agencies are also limited in what they can do unless you have a statutory demand or a court judgment in your favour.

Issuing a Statutory Demand

If a debt is undisputed and is for more than £750 (for a company debt) you can issue a Statutory Demand. This is another good way of inducing late payers to cough up. If a Statutory Demand is undisputed and not paid within 21 days of its receipt you can start insolvency proceedings against the late payer to wind up (liquidate) their company.

Settling payment disputes with the help of a solicitor

If the customer has ignored your overdue invoice emails or has been buying time with excuses, the fear of legal action can sometimes be enough for the customer to finally pay the outstanding amount. A solicitor will be able to send a formal letter to the customer on your behalf.

If the value claimed is minimal, you might feel it’s not worth paying for the services of a solicitor.

How much does it cost to take legal action?

The cost of taking legal action depends on the value of the claim. You can claim for values between £300 and £100,000 via Money Claim Online, and the fees would vary between £25 and 4.5% of the claim, depending on the value of the claim and providing the matter is a simple undisputed debt owed. Costs in the small claims track and the fast claims track will vary between £9 and £900, but you may not be able to recover these (especially in the small claims track) even if you win.

For certain matters beyond that you would have to evaluate whether the value of the claim is worth the legal expenses involved.

Minimising the risk of payment disputes

Taking legal action against customers over a disputed invoice should always be a last resort. To give yourself the best chance of getting paid, there are steps you can take to make your payment process as straightforward as possible for both you and your customers:

Start every job with a contract

Make sure that you have solid foundations in place before you start your work. Ideally you will have negotiated a contract setting out the terms of the agreement, delivery and payment dates, deadlines and proof of delivery of the products. You can also include termination clauses for non-payment and retention of title clauses, meaning you keep ownership of your products or work until they are paid for. It’s advisable to record these terms in writing – LawBite can draft bespoke contracts for your business at relatively low prices.

If both parties have entered into a contract and you’ve delivered what was requested under the agreement, you have carried out the work in good faith and therefore you are entitled to payment. Whether or not the customer has used the work is irrelevant.

If you don’t have a written signed contract, you would still have agreed some terms, whether these were set out verbally or in exchange of emails, and the terms of payment may well have been expressly set out, in which case you can still chase any money that is due.

Send automated reminders to late-paying customers

Invoicing promptly and chasing payment in the lead-up to when it’s due can reduce the risk of not getting paid on time and help make sure lawyers are only contacted as a last resort.

FreeAgent makes it easy to send customised invoices, with one-click payment links, track how much you're owed for each project and send automated reminders to any late-paying customers.

Find out more about how FreeAgent makes invoicing a breeze.

How long should you wait for an invoice to be paid?

As a guideline, you can issue a statement of accounts almost a week before the invoice is due, but how much leeway you give the customer is up to you. You can start chasing the day after the agreed period that you have given has expired, or give them a few more days’ grace. If you have not specified a credit period, the law sets a default period of 30 days after which interest will accumulate.

Charging interest on overdue invoices

Charging interest on late invoice payments can provide customers with the incentive they need to pay up. The late payment of debts legislation, which includes the Late Payment of Commercial Debts (Interest) Act 1998 and The Late Payment of Commercial Debts Regulations 2013, gives businesses the statutory right to claim interest on late payments from any other businesses. Under the 1998 Act, if no payment date is set businesses have a maximum of 30 days to pay an invoice before default interest sets in at a whopping 8% above the Bank of England Base Rate. You should outline how much interest you plan to charge for overdue payment in your initial contract.

The legal status of the late-paying business is irrelevant, so you would be able to charge interest whether the business is a limited company, a partnership or a sole trader. Businesses usually have 60 days to pay any interest due and these regulations apply across Europe.

Clive Rich is the founder and Chairman of LawBite. Belinda Naiken-Payne is a corporate and commercial lawyer. If you want to speak to Clive or Belinda about any of the above, you can do so by entering an enquiry via LawBite's Business Legal Advice form.