The pros and cons of taking legal action against late paying customers

29/10/2019

With two in five small business owners (40%) saying that they are taking legal action against customers not paying them on time, we consider the pros and cons of taking legal action to recover what’s owed.

According to new research from Hitachi Capital Business Finance, three in five small businesses are affected by late payments (62%).

These unpaid invoices are negatively impacting business owners and their cash flow.

For example, one in five business owners (20%) are not paying themselves, 36% are unable to pay suppliers and one in three (35%) have been forced to seek short term-borrowing in order to make ends meet.

With this in mind, perhaps it’s not surprising that so many small business owners are choosing to take legal action in an attempt to get paid.

In fact, there has been a 22% rise in the number of small businesses choosing to pursue legal action in an attempt to recover overdue invoices.

But is taking legal action against late payment the right choice?

Here we consider the pros and cons of doing just that to help you decide if it’s the right step for your business.

The pros

Whilst some customers will respond to the debt recovery techniques employed by your business, others need an even firmer approach to persuade them to settle outstanding invoices.

This is where legal proceedings can have the best impact.

Sometimes, a letter before action is all that is needed to get the customer to pay, or at least open a dialogue about the debt with the customer because taking legal action shows that you mean business.

No business wants to be taken to court if they can avoid it – a County Court Judgment stays on a business’s credit report for six years – and receiving a letter before action can shock them into putting your invoice to the top of the pile.

The cons

Due to the time-consuming and costly nature of taking legal action against late payment, it is often considered as a last resort.

The legal system can be complex and, with a lot of legal jargon to understand, it can be off-putting for many businesses.

Going legal is often seen as the most expensive approach to recovering unpaid invoices. But, legal charges vary depending on the size of the debt involved and the action taken so it is important to evaluate each debt individually.

Once this route is taken it is likely that customer relationships will be damaged beyond repair. However, you must ask yourself if you want to keep a customer that consistently fails to pay on time.

The most important thing to remember is that success is not guaranteed.

What’s the alternative?

Whilst taking legal action against late payment can be beneficial in some instances, there is another option for businesses to consider before it gets to that stage.

Instructing a debt collection agency to chase overdue invoices on your behalf could be all that’s needed to encourage customers to settle outstanding payments.

In the same way that taking legal action shows clients you mean business, the added weight of a third party can offer the same encouragement to make payment.

Many debt collection agencies prefer an approach of mediation to secure payment, rather than going straight in with the threat of legal action.

This softer approach can help to preserve your relationship with that customer.

Plus, unlike court proceedings most collection services use success-based pricing. This means that you only pay if your money is successfully recovered.

It’s always worth remembering that no two debts are the same. Each overdue invoice will need to be assessed individually to decide which course of action is likely to deliver the best results.

Further reading: Your options when a debt becomes overdue

Remember, prevention is better than cure

Whilst taking legal action may help with that specific unpaid invoice, it’s important to remember that prevention is always better than cure.

Therefore, if late payment is impacting your business you should be looking at your credit control process to identify where improvements could be made.

Using this information, you can then adjust your processes to prevent further late payments from occurring in the first place.

For tips on how to improve your credit control process read:

Or, for more information about your options when a debt becomes overdue or to talk to someone about your specific situation, please call us on 0800 9774848 or request a call back.