Debt Collection Step by Step

Is it a debt or an overdue payment?

Decide quickly when it is a debt and not an overdue payment. An overdue payment might only need a gentle nudge from you by phone, email or letter requesting payment. The most I recommend you allow your customer to be overdue is 7 days.

When the invoice becomes seven days overdue I recommend that you send a polite 1st reminder letter.

If the customer has been with you for a while, then you might recognise a change in their payment behaviour. Perhaps the customer usually pays you on a regular day of the month or paid by card when you rang them? Have their payments become irregular and now you can’t get hold of them. If so, then this is the time to become serious about the debt collection process.

Your Formal Debt Collection Process

Once you decide that your customer isn’t paying after sending reminders and calls, it is time for your formal debt collection process to start. Each business has their own time frame of how many days to allow a customer to pay before starting this process. I personally allow customers to be 14 days’ past terms before starting the formal process.

If you are hoping that a customer with a four-year-old debt is going to pay you without following this formal process, they won’t.  By following a formal debt recovery process, you are more likely to obtain your money.

Research the company you are taking court action against:

We usually begin by obtaining a credit report on the debtor to check their financial status and to verify their address. Don’t skip it, it’s important in case your debtor has moved premises. These checks also give you some indication of how successful you may be if you have to take legal action. Also you can research the company on Companies House here.

The Letter Before Action

The next part of this step-by-step is for you to send a Letter Before Action (LBA), (sometimes called a Letter Before Claim). 80% of the time a well written LBA often does the trick. Your customer will know you mean business and will want to pay you right away.

If the debtor is a limited or ltd company, you need to allow them fourteen days to make full and final payment to you.

If the debtor is a sole trader or consumer, then you have to follow “Pre-Action Protocols” Guide Here and allow 30 days for them to pay.

Don’t Forget to add the Late Payment Fee

Add a legal Late Payment Fee (allowed under the Late Payment of Commercial Debts (Interest) Act 1998) if you haven’t already done so. The Late Payment Fee you can add to the debt is governed in law. They are £40, £70 or £100 depending on the debt amount owing.

Work out your late payment fee here

Fixed Payment Plan Alternative

Offering a debtor a fixed payment plan is a great alternative to court action because perhaps your customer is having a temporary cash flow problem? Maybe one of their own customers has not paid an invoice, which has a knock-on effect on payment to their creditors.

A payment plan allows a business breathing space in difficult times and saves the necessity for court action or formal winding-up process.

Offering anything from 5 – 52-week payment plans, depending on the debt amount and how much difficulty the debtor is in is ideal. Negotiate this with your debtor and try and get the best deal for both of you.

Set the plan formerly

List each date the payment is due: For example 10th of the month, and next to it put the amount. If a customer owes a £1000, add the Late Payment Fee amount of £70 total owed £1070.

Also let your customer know that a default from the arrangement will lead to immediate court action.

Legal Action

If no payment is made, or payment plan agreed, the next step is legal action through the small claims court. Do this on the day after the deadline date given on your Letter Before Action.

If you have not checked it already, make sure at this point you have the correct address. You can enter both the trading and registered addresses when submitting court action.

Work out what your court fees for submission are. Court fees are repayable by your debtor if you obtain a county court judgment (CCJ) or win the case if it goes to a court hearing. However, if the debtor is likely to go into administration or already has County Court Judgments then the likelihood of you being successful are slim. In this instance you will foot the bill for the court fees.


Once court action is initiated you may wait between 23 and 30 days taking weekends into consideration.

If your customer (debtor)/(defendant) has not responded to the county court claim then you can request judgment against the defendant.

Once you have the judgment (CCJ) the next step is to request a warrant using the county court (or high court bailiff if the debt amount is over £600). The high court bailiffs have more powers than the County Court Bailiffs.

The stages of debt collection above are the necessary stages when trying to obtain payment from a customer that has gone past the point of collecting to your agreed payment terms.

Other reasons why your customer has not paid, which often only come to light once the payment is overdue include:

– The wrong name and/or address on invoice?
– The wrong or faulty goods/service sent to customer and the query was not resolved?
– Did you invoice for at the wrong price?
– The customer has paid, but you haven’t allocated the cash to their account
– Returned goods and a credit note not raised.
– Maybe you are not communicating with the correct department or person responsible for payments. Larger companies usually have an accounts payable department.
– Incorrect or no purchase order number, so the payment was not authorised.
– Payment terms not agreed. Even though you may have your terms stated on your invoice, your customer may have different terms.

To save time, stress and improve your chances of being paid without the need to go to court, consider hiring a professional debt collection agency to deliver the results for you.

Many debt collection agencies work on a no win no fee basis. Always check first before you submit your debt and ensure there are no upfront fees.

Debt Collection Policy

Franklin James Credit Management recommends:
– That you have a debt collection process in place.
– Draft Payment Plans and Letter Before Action templates for consistency.
– Decide at what point in your debt collection process to send the Letter Before Action.

For more advice on the steps to collect a business debt, contact us today.

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