When a customer will not pay: what to do, and by when

Most businesses leave debts outstanding far too long, for understandable reasons: not wanting to lose the customer, and expecting payment eventually. But the longer it runs, the less likely recovery becomes. Assets move, other creditors get there first, and the statutory clock keeps running.

What most business owners do not know is that a trader's claim for the price of goods or work has a two-year limitation period, not the ten years usually assumed. The exception matters as much as the rule: where the buyer took the goods for its own business, the period is five years, so most business-to-business supply falls on the five-year side and most consumer sales on the two-year side. Check who the debtor was before writing off an old invoice.

The other thing to settle at the outset is whether anything could actually be recovered. A judgment against a debtor with no assets produces no money. Checking the debtor's position matters more than filing quickly.

What should you do first when a customer will not pay?

• Demand in writing, stating the amount, the supporting documents and a clear date for payment. This letter does more work than people expect: it proves demand was made and it starts default interest.
• Ask the debtor to confirm the balance in writing, or to sign an acknowledgement of debt. An acknowledgement made before the period expires restarts the clock entirely.
• Check the debtor against the public record: filed accounts, land held, pending litigation — to judge what could be enforced.
• Negotiate an enforceable instalment agreement, with the whole balance falling due on any missed payment.
• If no agreement is reached, file — and consider interim relief at the same time where there is reason to believe assets will be moved.

Which documents decide whether you get paid?

Trade debt claims turn on documents, not testimony. Businesses that keep the file complete are usually paid without reaching court, because the other side can see there is nothing to argue.

• The purchase order or contract, showing the price and terms agreed.
• Delivery notes signed by the recipient, proving delivery.
• Invoices and tax invoices issued with every required particular.
• Messages in which the other side acknowledges the balance or asks for time.
• The ledger showing the outstanding balance and its movement.

What can you do about a bounced cheque?

A cheque carries its own route of recovery, separate from the underlying debt, and a shorter deadline. Present it within time and keep every return slip from the bank — it is the single most important document.

Issuing a cheque knowing there are no funds can also be a criminal offence, which is effective leverage in negotiation. The period for complaining is very short, so it should not be left.

What if the debtor has many creditors and too few assets?

An ordinary claim may achieve nothing here, because whoever enforces first takes what there is. Insolvency proceedings gather all the assets and distribute them proportionally, halting individual enforcement.

Where the debtor is a business with a future, reorganisation often returns more than liquidation, because creditors are paid from a business that keeps trading rather than from assets sold at auction.

What to put in place before it happens

• Set credit limits and terms in writing, and review when the balance exceeds them.
• Have documents signed by someone with authority to bind the counterparty, not by staff who cannot — it determines who can be sued.
• Take security from major customers, including director guarantees where appropriate.
• State the default interest rate in the contract.
• Check a new counterparty before extending credit: filed accounts and pending litigation.

This page is general information, not advice on your situation. Time limits differ by the nature of the debt. Bring the documents you hold for review before deciding what to do.