Getting paid: recovering a business debt

The steps from unpaid invoice to money in the bank — and how to avoid paying more to chase than the debt is worth

Late payment is the most common legal problem a small business faces, and the one where doing things in the right order matters most. This note explains the escalation ladder from a polite chase to court and enforcement, the costs and interest you can add along the way, and the point at which each step stops being worth it. It is general information, not advice on a particular debt.

First: is the debt actually disputed?

Everything turns on this question. A debtor who cannot pay is an insolvency problem; a debtor who will not pay but has no real defence is a collections problem; a debtor who says the work was defective, the goods were wrong, or the contract said something different has raised a dispute — and a disputed debt is a claim, not a collection. Chasing a genuinely disputed debt as if it were simple arrears wastes money and can backfire on costs. Be honest with yourself about which you have before you spend anything.

The escalation ladder

The structured chase. A firm, dated sequence — statement, reminder, final reminder — each escalating in tone, each keeping a record. Many debts are paid here, at no cost. Add the interest and compensation the law gives you (Part 3): it changes the debtor’s arithmetic.

The letter before action. A formal letter — from a barrister, on counsel’s letterhead — setting out the debt, the interest, the deadline, and what follows if it passes. This is the single most cost-effective step on the ladder: a large share of undisputed debts are paid within days of one. It must comply with the pre-action rules (see our note The letter before action, explained), because the court expects proper warning before a claim.

The court claim. For most debts this is a money claim issued online. Claims up to £10,000 are usually allocated to the small-claims track, where each side generally bears its own legal costs — which is why the economics matter (Part 4). If the debtor does not respond, you can enter judgment in default without a hearing.

Enforcement. A judgment is a piece of paper until it is enforced — by bailiffs or High Court enforcement officers, a charge over property, an attachment of earnings, or a third-party debt order against the debtor’s bank account. See our companion note Enforcing a judgment.

Interest and compensation — the law is on your side

For business-to-business debts, the Late Payment of Commercial Debts (Interest) Act 1998 gives you, unless your contract provides its own substantial remedy: statutory interest at 8% above the Bank of England base rate; a fixed compensation sum per invoice (£40, £70 or £100 depending on the size of the debt); and the reasonable costs of recovery beyond that. Claiming these is not aggressive — it is the statutory default, and stating them accurately in the chase and the letter before action is often what persuades a debtor that delay now costs more than payment.

The economics: when to stop

Before each step, ask three questions. Can the debtor pay? A judgment against an empty company is worthless; a quick look at filed accounts, county-court judgments already registered against them, and whether they are still trading tells you a lot. What does the next step cost against the debt? Court fees scale with the claim; on the small-claims track you will not recover legal costs even if you win. What is the relationship worth? Suing a customer you want to keep is sometimes right and often final. There is no shame in writing off a debt the arithmetic does not support — the discipline is deciding on the numbers, not the anger.

The statutory demand warning. For undisputed debts over £750 against a company, a statutory demand followed by a winding-up petition is sometimes urged as a shortcut. It is a serious escalation, not a collection device: using insolvency proceedings to pressure payment of a disputed debt is an abuse of process, and it can be expensive to unwind. Take advice before going anywhere near it.

Prevention: the cheapest recovery is the one you never need

—Trading terms that fix payment dates, interest, suspension rights and retention of title — and that actually apply to each order (see Your trading terms & contracts, explained).
—Credit-check new customers above a threshold; take deposits or staged payments on larger work.
—Invoice promptly and accurately — a queried invoice is the most common honest cause of delay.
—Chase to a fixed rhythm, in writing, from day one overdue. Debtors pay the creditor whose process looks most certain.

Where we come in

A letter before action on counsel’s letterhead, a candid fixed-fee opinion on whether a disputed debt is worth fighting, or representation at the hearing if it comes to one — each is a defined piece of work at a fixed fee agreed before we start. Tell us the amount, the story and what the debtor has said, and we will tell you whether the next step is worth taking.

This note is general information about debt recovery in England and Wales and does not constitute advice on a particular debt. Figures such as court fees and interest rates change; check the current position before acting.

Barraj Legal — a trading style of Rhys Johns, a barrister authorised & regulated by the Bar Standards Board. Sophia House, 28 Cathedral Road, Cardiff CF11 9LJ