How to recover a business debt
If you’re a business or sole trader, customers who don’t pay what they owe can have a significant impact on your finances.
Of course, it isn’t always just customers who might owe you money. You might need to recover a debt from your own suppliers, if the services they provide aren’t up to scratch.
“As a creditor, you’ve got three main questions to consider when trying to recover a debt:
- Do I attempt to settle the debt out of court?
- Do I issue court proceedings?
- Do I write the debt off if it’s small in value or I know they can’t pay?
The answer to these questions will depend on several factors, the biggest being the circumstances of the person who owes you money, aka the debtor.
They could be an individual, a ‘trading as’ firm, a partnership or a limited company – the best strategy for recovering your debt will depend on this as well as how much money is owed.
Why the rush?
Many people think that, in order to recover a debt quickly, they need to rush to court as fast as possible.
In reality though, you can recover debts without court action. Indeed, a court will expect you to explore these steps, particularly those listed in the government’s ‘pre-action protocol’, before making a claim.
The pre-action protocol exists to promote dialogue, settlement of debts without court action and lower legal costs.
How to settle a debt out of court
The first step is to send your debtor a pre-action letter requesting payment. You should allow them at least 14 days to reply before taking further action.
Your solicitor can help draft a formal pre-action letter to ensure it doesn’t invalidate any claim you might make later.
Pre-action letters are often very successful at recovering debts – sometimes just the prospect of legal action is enough to get a debtor to pay.
If the letter doesn’t yield a response, you might also want to consider alternative dispute resolution – through a mediator or arbitrator, for example.
If none of these methods are successful, you may need to go to court to recover your money.
How to reclaim a debt in court
Before deciding whether to reclaim a debt in court, you need to realistically assess why you debtor is refusing to pay.
Is it because they can’t, or because they won’t? If they simply don’t have enough assets to pay off the debt, then the cost of pursuing them in court may outweigh the amount of money you can actually reclaim.
This isn’t just a pragmatic question – the court will want to see evidence that you have considered the debtor’s ability to repay you.
In general, the odds of your claim succeeding will be greatly improved if you can show that you’ve given the debtor every chance to pay and reasonably attempted to settle out of court.
Debt claims are issued at a central County Court Money Claims Centre (CCMCC).
Once the court approves your claim, the debtor usually has up to 28 days to respond – either by admitting the debt, defending (denying) it or lodging a counterclaim.
The right strategy from here will depend on the defendant’s response and your individual circumstances – no two debt claims are ever the same.
For example, if you’re owed less than £10,000, the debt will be treated as a ‘small claim’, which means you’ll have to pay most of your own legal costs, even if you win. If the debt is over this amount, you might stand a chance of recovering your legal fees from the debtor on top of the debt.
It’s when facing questions like these that having an experienced debt solicitor on your side can really help – they’ll be able to provide you with tactical recommendations as well as legal advice.”