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A client is refusing to pay. What should I do?

By James Omond

from StartupSmart.com.au
19 April 2012

A client is refusing to pay. What should I do?

“A client has repeatedly broken contractual arrangements and is now refusing to pay me for work I’ve done. Should I threaten legal action and, if so, is that usually enough to get people like this to comply? I don’t really have the time or resources for a lengthy legal battle.”

The question you have asked is unfortunately all too common, as there seem to be many people out there in the business world who, for whatever reason, feel they don’t have to pay their suppliers.

The worst ones are those who do this so often they know what size debt they can run up before it becomes worthwhile chasing them for it.

They rely on people like you not having the time or money for a lengthy legal battle.

So what to do about them?

It sounds glib, but the best way to avoid this is not to get into the situation in the first place – so for new customers seeking credit, you need to get information that allows you to make an informed decision. This might be getting trade references, doing a reference check, etc.

Another approach for new customers might be to cop the merchant service fee and take payment by credit card until you’ve established a trading history.

Once you have made the decision to offer credit, then the critical element is to have a set of terms and conditions (the fine print) which a customer signs before you provide goods to them on credit.

There are many things which should be covered by your terms.

In this case, your terms should cover the interest on overdue amounts and the recovery of costs and expenses.

Interest on overdue amounts

Interest is payable on overdue amounts, and you need to state the maximum interest rate which will be charged.

This should be an easily available reference rate which might be an RBA rate plus a margin or even your own bank’s rate on Visa and MasterCard accounts.

Note that you have no automatic right to charge interest on overdue amount – you can only claim interest if it is “in the contract”.

Recovery of costs and expenses

You should also state that you can recover all of your costs and expenses in recovering any unpaid debt.

This means that you can claim your legal fees, which in some cases might be as much as the debt itself.

Once again – you have no right to claim your debt recovery fees, unless it is a contractual term, or unless you actually go through the courts.

As far as different means of debt recovery are concerned, if the debt is for more than $2,000, and the customer is a company, you can use the “statutory demand” proceedings under the Corporations Act.

If you take this approach, the customer is deemed to be insolvent (and therefore can be wound up) if they do not pay the statutory demand within 21 days of service. (This needs a demand in the form set out in the legislation, supported by an affidavit.)

Once you issue this demand, the customer’s only option is to go to the Supreme Court or Federal Court to get an order that your demand is somehow deficient.

For smaller debts, I would recommend using a debt recovery service (one that involves a “no recovery, no pay” requirement) – even though they will probably charge 25%-30% of the debt – at least this will be a fixed maximum that you know you are up for.

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