Your Hub


Forgot password?

Register for ANZ Biz Hub

You'll get easy registration for workshops offered in your area.

Find out more

Find out more

Find out more

How to handle debt, collect what's owed to you and considerations for going to court print Print

  • 3.9 out of 5 stars
  • from 100 ratings

A golden rule in business is to collect money owed to you fast. Faster than you have to pay out. So it’s important to have the skills to handle the people who owe you money. So what are the best ways to collect debt without upsetting your customers? And should you go to court as a last resort?

Debt collecting
A cautionary tale

Let’s start with a fictional case study to highlight the serious consequences of poor business practice that can lead to debt.

The owner of a new electrical contracting business felt fortunate to win a substantial tender for all the electrical work on a new housing development and promptly engaged two extra workers for the task. The property developer radiated confidence and experience, was very persuasive and drove a luxury car. After months of hard work without payment, the electrician opened the newspaper one morning to discover that the property company owed millions and had gone into receivership. His business took years to recover from the subsequent loss.

Four lessons from the experience:

  1. Securing the work was not 'good fortune'. The property developer had exhausted his credit with other trades people. A new business in town was a natural target for him.
  2. Isolation in business is dangerous. Join your industry association or Chamber of Commerce for market news and to access networking word of mouth.
  3. Take steps to protect yourself if the financial exposure is substantial. Do credit checks. Get personal guarantees (it turned out that the property developer did have private wealth, but the debt was in his company's name).
  4. Strict insistence on progress payments would also have limited the exposure.

Establish efficient systems

As with most things, prevention’s better than a cure. If you have good processes in place for collecting debt, the less likely it is that you’ll have to chase debtors. Key factors to keep in mind are:

  • Age of the debt – the longer you leave it, the tougher it’ll be. Chase up unpaid invoices as soon as possible. Set up a flag system so you know who owes you money when. Most accounting software products let you do this.
  • Avoid large debts – have customers pre-pay in instalments or pay deposits. Most people accept this as normal practice.
  • Check each new client’s credit history; it’s much easier to find out early if they have a record of poor payment. And if they look suitable, ensure they sign a credit agreement with you.

Read five steps to make sure you get paid to help you put good credit management systems in place.

Make sure the debt is valid

Before you follow up on debt, make sure you familiarise yourself with all the details. Confirm that you supplied the right goods and services, in the right quantities, for the agreed price and within the agreed time frame. Also be sure that the quality of the products or outcome of the service was acceptable.

Collecting your money

Despite your best efforts, chances are you’re going to have to chase up debt at some point. There are three main ways to do this:

  • Personal visits – this is the most effective form of debt collection, but is really only practical if the debtor is close by. It’s important to be well prepared for a personal visit. Be clear in your own mind what you want to achieve, and how.
  • Phone calls – this is still a direct and fast method. You’re making personal contact and maintaining your relationship by discussing what options are available.
  • Letters and email reminders – this is the most common because it’s non-confrontational. It’s also the least effective. It works with customers who intend to pay, but it slipped their mind. It’s less successful with habitually late payers.

Tips for better results

If you’re going to pay debtors a visit or give them a call, keep these handy hints in mind to ensure better results:

  • Make sure that your business isn’t at fault in any way, or that no-one on your staff has upset the customer. Consider if they’re usually a good payer or if this is becoming a habit. Take into account whether they’ve tried to reduce the debt, and whether they’ve tried to explain things to another staff member.
  • It’s important to speak with the person who’ll actually be paying the account.
  • Keep a record of the conversation, including any agreed action; "I understand we'll be getting a deposit from you by the 15th." This way can confirm the details in writing or an email, and be able to refer to them again in any future follow-ups.
  • Try not to make them feel threatened. They should feel the urgency, but also the benefits of settling the bill. So try to keep the atmosphere as relaxed as you can. This is especially important for customers you want to retain.
  • Give them a way out. Ask if they can pay a portion now, and the rest later. Or can they use their credit card to pay you? Get some commitment.

Getting serious

If you’re not having any luck with visits, phone calls, emails or letters, you could consider more serious collection tactics:

  • For a fee, a lawyer will send a legal letter. Just make sure you’re prepared to follow through if the letter promises action for continued non-payment.
  • You can assign the debt to a debt collection agency. Research the collection agency first to ensure they know what they’re doing.
  • You can sell your invoices to a factoring company in return for cash. This tends to be for larger businesses and bear in mind that you would contract out all your invoices, not just the poor payers.
  • You can take them to court.

Going to court – is it worth it?

This option should always be regarded as a last resort. It’s expensive, time-consuming, and it usually means the end of your relationship with the customer. So there are some key things to keep in mind before you make the decision.


The decision to take someone to court should always be based on business principles and not a sense of outrage or desire for revenge. It’s going to cost you a lot of money, so make sure it’s worth it. Keep the following in mind:

  • Keep control over decisions. Decide each case on its merits and on purely economic grounds. Don’t let an agency make the decision for you.
  • Choose good lawyers and advisers. If you’re new to this, ask other businesses for recommendations on this.
  • Include the amount of time and stress you will spend on the total cost. Sometimes it’s actually ok to let it go and learn from the experience.

Assessing your chances

What you’re looking to do here is estimate how likely it is you’ll recover the debt. What percentage do you see as being most realistic?

Each debtor's case is different. The secret to making good decisions is research, either by you, or in co-operation with the agency you have chosen. Investing in research beforehand can save you considerable expense later. Here is a checklist to cover:

  • Does the debtor have the money, either in a lump sum or in instalments to pay you back? You can use a credit agency to help you estimate this point.
  • Is there an arguable defence, or, in fact, any dispute, genuine or not? Law courts are very expensive places to resolve genuine disputes. Even a sham defence can delay matters considerably. As discussed earlier, make sure the debt itself is not in dispute.
  • Does the debtor have any reputation to lose through the legal process? A long list of previous judgments spells out 'not much to lose'.

Are you very confident? Translate that to a 90% chance. Multiply the debt by the percentage you’ve arrived at. Then subtract what the cost of going to court is likely to be. Is it still worth going to court?


Small business owners often find chasing money owed to them like pulling teeth. It’s not pleasant and it’s not the reason you went into business. But when people owe you money, and it’s the lifeblood of your business, then you cannot afford to not take action. Customers will respect you for being firm but fair.

Tools & resources

Rate this article:

  • 12345 Click on the stars to rate

Share this: