Debt recovery for small business

If you are chasing unpaid debts from customers or other businesses, there are steps you can take to recover the money and measures you can put in place to reduce the chance of it happening again.

Preventing bad debts
How does a business recover debt?
What to do if a customer refuses to pay

Preventing bad debts

It is important to perform background checks on your customers before doing business with them.

To prevent bad debts occurring and protect your business, you should:

check whether a company is in liquidation or deregistered on ASIC Registers
only send out goods or provide services after customers pay their bill
provide simple, easy and clear payment options
invoice customers quickly
give discounts for paying on time or early
create sensible limits on the credit that customers can take out with your business.

Find more information see Information Sheet 26 Dealing with businesses and companies (INFO 26).

How does a business recover debt?

When you have not been paid for goods and services you provide, it may affect the profitability and cash flow of your business. It is important to establish a process to manage payments and recover debt.

These are some steps you can take to recover outstanding debts, including:

checking contract terms to see when payments were due
regular monitoring of when payments are due and received/not received
contacting the customer in writing to request payment
keeping records of all customer correspondence
setting up regular payment reminders
sending a formal letter of demand
considering hiring a debt collector if the customer still won’t pay
considering taking legal action
doing a property search on the Personal Property Security Register (PPSR) to recover unpaid goods.

What to do if a customer refuses to pay

In deciding whether to pursue debts, you’ll have to consider how much is owed, the cost and time it will take you to recover the debt, and whether the business you are chasing has the ability to pay the debt.

Get legal help to recover debts

If your customer refuses to pay or doesn’t return calls, here are some organisations that offer legal help.

Small Business Commissioner or Ombudsman

Small business commissioners and ombudsmen are government appointed advocates that represent the interests of small business. Services include advice on how to recover debts and subsidised or low-cost dispute resolution. Contact your state small business commissioner or the Australian Small Business and Family Enterprise Ombudsman.

Community legal centres

Community legal centres offer evening advice clinics, letter writing assistance and help with filling out court forms. Search for a local community legal centre on the Community Legal Centres Australia website.

Legal aid commissions

Legal aid commissions can assist with serious legal action that you can’t afford to take on yourself. You should check whether your case fits their guidelines. Services include free information sessions and initial legal advice, letter preparation and assistance running a court case. The Australian Government Attorney-General’s Department website provides links to all legal aid commissions.

Small claims tribunals and lower courts

Tribunals and lower courts provide quick, simple, legally-binding solutions, without having to use a lawyer or deal with court procedures. Services include general advice, assistance completing forms, help arranging a summons and informal dispute settlement before a magistrate. The Australian Competition and Consumer Commission’s (ACCC) website has a list of small claims tribunals.

District, county, and supreme courts

These courts will decide on disputes where the amount owed is too high for a small claims tribunal or lower court. Consider using a lawyer if your case goes to one of these higher courts, as procedures are more formal and complicated.

Private legal advice

Using a lawyer can sometimes save you money if you are owed a large amount, but they can also cost you money if the court doesn’t order the company at fault to pay your legal costs. Services a lawyer can provide include tailored legal advice and guidance, letters of demand, and court case management from beginning to end.

Debt collection agencies

Using a debt collection agency can save you time and money pursuing the debt, but they often take an amount recovered as part of their service offerings.

Their services include contacting and pursuing debtors, sending a letter of demand, preparing a summons and running court action.

To find out more on how the credit legislation applies to debt collectors, please see Information Sheet 101 FAQs: Does the credit legislation apply? (INFO 101)

Remember that even if an order or judgement is made for a business to pay a debt, you’ll still need to enforce the order. This can be difficult and can be an added cost. Find out more about the rules on debt collection on the ACCC’s website.

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.