Debt Recovery

Do you have a bad debt?

One of the downsides of doing business is that from time to time your invoices will go unpaid and you can be left out-of-pocket hundreds or thousands of dollars. This can threaten the viability of your business, particularly if you are a small business. If this has happened to you, the things to think about include calling or writing to the debtor with a friendly late payment reminder and follow-ups (make sure you keep a record), informal negotiations with them, sending a letter of demand, and ultimately perhaps engaging a debt collecting service or taking the matter to a small claims tribunal or a court.

What is a letter of demand?

A letter of demand is a letter written to the debtor ‘demanding’ that you pay them the monies you are owed. Such a letter is usually sent when you have tried unsuccessfully to get your invoice paid and some more serious action is needed to get your money. A letter of demand is often the final reminder letter you send before taking legal action. You can send it yourself or ask a lawyer to write it on their letterhead. This sometimes encourages the debtor to take the matter more seriously.

Before writing a letter of demand, it is important to send first and second reminder letters. These can be friendlier and help you maintain your business relationship with the debtor if this is important to you. A letter of demand states how much is owed, what for, and when the invoice needs to be paid. It may also include a warning that you will consider legal action if the debt is not paid by a particular date. The title 'Letter of demand' at the top of the page lets the debtor know you are serious about getting your money.

It is important to understand the consequences of sending a letter of demand. Unlike alternative dispute resolution (a process which can reduce damage to, and even improve business relationships, and which you might want to try before sending a letter of demand), sending a letter of demand may escalate a dispute. Even so, this action may be necessary to recover a debt.

Before sending your letter of demand, it may help to get some advice from someone who has had experience with debt recovery before. It is also important to find out who owns the business that owes you money, as it may not be the person with whom you made the original agreement. The best approach is to send your letter of demand to the person who owns the business. Sample letters of demand are provided at Attachment A. below. It is a good idea to let another person, such as one of NatRoad’s employment and industrial specialists cast an eye over the letter before you send it to ensure that your letter is not unnecessarily inflammatory.

When do I send a letter of demand?

There are many situations in which you might consider sending a letter of demand. A typical scenario is described below. Bruce, an owner-driver, transports goods and services for a number of different customers. One day, Trevor, an existing customer and small farming business owner, called Bruce in a panic – his hay baler had bailed/died/crashed/bitten the dust just before baling time. Trevor urgently needed a replacement machine so that his hay could be baled before the predicted heavy rains and impending floods. Bruce, being a farmer’s son, understood Trevor’s situation very well and being a good bloke, he postponed two other jobs to help Trevor with his predicament.

Later that day, Bruce was on site at the supplier’s, willing and ready to collect and deliver a replacement vehicle Trevor had organised. Bruce had told Trevor that he would charge a fixed pick-up, transport and delivery rate of $2,500 (plus GST) for the urgent delivery of the replacement baler. Trevor agreed to pay 'whatever it took' to get the replacement vehicle because his business and his livelihood depended on being able to start hay baling the next day. Bruce did the job and sent Trevor by email and post, an invoice with 14-day payment terms, together and details of the payment methods available.

Three weeks later, Trevor still had not paid the bill. Bruce have him a friendly call and Trevor said he would pay the invoice the very next day. A further two weeks went by without the payment being made. Bruce tried to call Trevor again, without success. Bruce sent Trevor a late payment reminder letter but Trevor still did not pay the account. After two more weeks and more unmet promises from Trevor to pay, Bruce sent a second reminder letter explaining that if Trevor didn't pay, Bruce would have difficulty feeding his family and paying his own bills.

Bruce decided that he didn't want to do any more jobs for Trevor. He was upset that Trevor, who he thought was a good egg, hadn't paid him after he’d dropped everything to help him at the risk of disappointing his other customers. Being the good bloke he was though, Bruce decided to give Trevor one last opportunity to pay the invoice by sending a letter of demand. If Trevor doesn't pay the invoice soon, Bruce intends to apply to the Small Claims Court.

A checklist for a letter of demand

• Have you have already tried friendly means to recover your debt, such as a polite phone call or two, or late payment reminder letters?
• Does your letter of demand include precisely accurate information? You want to avoid anyone being able to say that something in the letter is false or misleading.
• Does your letter of demand include a late payment interest rate? Note that this should only be included if it was specified in the contract.
• Does the letter of demand inform the debtor of any action you are not in fact willing to take? You should only mention action that you are prepared to take.

Is the letter of demand polite and respectful? Your letter shouldn't harass the debtor.

• Ensure you sign and date the letter.
• Attach copies of all relevant supporting documentation such as your contract, invoice, first and second late payment reminder letters and any relevant emails, faxes or letters.
• Keep a copy of all the original documents and the signed letter of demand.

Important: Make sure you send the letter by registered post and that you request a 'signed proof of delivery' card. Also, it is good practice to keep this card in case you need it as evidence in court later.

Should you use a lawyer?

Sometimes it is helpful to use a lawyer to write your letter of demand. A lawyer can write a letter of demand for you on the law firm's letterhead. This can sometimes encourage the debtor to pay the debt promptly. Most law firms charge a set fee to write a letter of demand on your behalf. This can be a relatively inexpensive and effective way of recovering your debt. Make it clear to the lawyer that the letter of demand is all you are asking for. Getting advice from a lawyer will usually cost you more. Remember your employment and industrial relations legal specialists at NatRoad can also help you with this for a very competitive fee.

Debt collection services

If you haven’t been able to recover your debt after friendly reminders, informal negotiations and a letter of demand, you might decide to use a debt collection service (DCS). A DCS is a business that tries to recover money for you for a fee. Using a DCS shows your errant customer that you have decided to hand the matter over to professionals. Of course, doing this could further strain your business relationship with your customer. However, sometimes it may be more important to get the money you are owed than to maintain a relationship with a customer.

Traditional debt recovery methods

Traditionally, a DCS sends a 'letter of demand' to the debtor on its letterhead, demanding that the debt is paid by a particular date or legal action may be taken. If necessary, the DCS will issue a second, 'final' letter of demand or follow up with a 'phone demand'.