Debt Recovery for Small Businesses: What to Do When a Customer Won’t Pay

When a customer stops paying, the instinct is to chase harder or write the invoice off. Neither is a plan. Debt recovery for small business works best as a short sequence: check the debt, chase it, add what the law lets you add, send a formal letter, and only then decide whether a bigger step is worth the cost.

This guide walks through that sequence for a small business owner in Manchester or anywhere in the UK. It covers what to check first, what interest you can claim, how a letter before action works, when a statutory demand fits and when to stop.

Check the Debt Before You Chase It

Start by asking whether the customer has a genuine reason not to pay. A disputed invoice needs a different approach from one that has simply been ignored, and several formal routes only work on undisputed debts. If the debt is contested, our commercial disputes advice covers the pre-litigation options.

Then gather the evidence in one place: the contract or order, the invoice with its due date, proof that you delivered the goods or finished the work, and every message about payment. Be clear who owes the money. A limited company, a partnership and a sole trader are treated differently, and you need the correct legal name.

Find Out Whether They Can Pay

A debt you cannot collect is not worth much more than one you have written off. Check the customer’s company record at Companies House for filing problems and for any insolvency notices in The Gazette. If the customer is insolvent, the options narrow and you will usually be one of several creditors, so the earlier you know, the better.

Also check whether anyone gave you a personal guarantee. A director who guaranteed the debt can be pursued in their own name.

Start With a Reminder and a Phone Call

Most late payments are not refusals. They are forgotten invoices, absent finance staff or tight cash flow. A short reminder the day after the due date, followed by a phone call, settles a lot of them. Calling also tells you quickly whether you are dealing with a delay or an unwillingness to pay. If the customer cannot pay in full, agree a payment plan in writing.

Keep a note of each contact, with the date and what was said. It is useful if the matter goes further.

Add Interest and Compensation

If the customer is another business, the Late Payment of Commercial Debts (Interest) Act 1998 lets you charge statutory interest at 8% above the Bank of England base rate in force on the previous 30 June or 31 December, plus a fixed sum for each late invoice: £40 for debts up to £999.99, £70 for debts from £1,000 to £9,999.99 and £100 for £10,000 or more. If your terms set their own late payment interest, that may apply instead, so check them first. We explain the calculation and the limits in our guide to the late payment of commercial debts.

Adding interest is not only about the money. A statement showing the amount growing each day tends to move an invoice up the customer’s list.

Send a Letter Before Action

If reminders fail, send a letter before action. It sets out the debt, the basis for it and a deadline, and it warns that you will start court proceedings if the debt is not paid. Courts expect this step and skipping it can affect who pays the costs even if you win.

Which rules apply depends on who owes you. Where the debtor is an individual or sole trader, the Pre-Action Protocol for Debt Claims applies. You must enclose an information sheet, a reply form and a financial statement form, and the debtor has 30 days to respond. Where the debtor is a company, LLP or partnership, the Practice Direction on Pre-Action Conduct and Protocols applies, which expects a clear letter and a reasonable time to reply. Many creditors allow 14 days for a straightforward invoice.

Statutory Demand or Court Claim?

Where the debt is clear, due and undisputed, a statutory demand is another route. It gives the debtor 21 days to pay or agree terms before you can apply to bankrupt an individual who owes £5,000 or more, or to wind up a company that owes £750 or more. It is the wrong tool for a genuinely disputed debt, and courts treat a demand served with no intention of going further as an abuse of process.

A court claim is how a disputed or unpaid debt is decided. Smaller claims, usually those under £10,000, go to the small claims track of the county court, and you can issue online. A judgment does not collect the money by itself. If the debtor has no assets, enforcement may still recover little. Applying for a petition or a court claim is work for appropriately regulated litigation professionals, and we do not do it, but we can explain the route and what it is likely to cost.

Debt Collection Agency or Lawyers?

A collection agency chases debts on your behalf, usually for a share of what it recovers. Fees can be a large proportion of a small debt, so ask for the basis in writing, and check the agency’s accreditations and how it speaks to your customers. Lawyers cost more upfront, but they can deal with disputes, interest, pre-action rules and settlement terms, and a letter from a solicitor often prompts payment on its own. Our debt recovery lawyers in Manchester advise business creditors on this. Which suits you depends on the size of the debt and how much the relationship matters.

Is Debt Recovery for Small Business Worth the Cost?

Before you spend anything further, ask six questions.

• Is the debt undisputed?

• Is the evidence clear?

• Can the debtor pay, and does it have assets?

• What will each next step cost, and how much of that can you recover?

• Would a settlement for less be a better commercial result?

• Does the relationship still matter?

Sometimes the sensible answer is a part payment and a signed settlement.

Time Limits

Most simple contract debts, including unpaid invoices, can only be pursued in court within six years under the Limitation Act 1980, usually counted from the date payment fell due. A letter does not stop the clock, but issuing a claim does. Part payment or a written acknowledgement of the debt from the customer can restart the period. Do not leave old invoices to age.

Stop It Happening Again

• Put payment terms in writing before work starts, with a late payment clause that also preserves your statutory rights.

• Check new customers before extending credit and set limits to match.

• Invoice promptly and accurately, with a clear due date.

• Chase on the due date, not weeks later.

• Ask for a deposit or a personal guarantee where the risk is higher.

Final Thought

Good debt recovery is mostly sequence and records. Check the debt, chase early, add interest, send a proper letter and weigh each next step against what you can realistically recover. Most debts are settled long before a court is involved.