Asking for a debt to be repaid is an uncomfortable but sometimes necessary part of being a business owner. Usually, sending a friendly reminder or giving a courtesy call is enough to prompt the customer to pay you. But if the customer isn't responsive, you might have to escalate the situation.

Recovering overdue payments

Use the following steps as a guide to recovering an overdue payment from a customer. The process starts with friendly reminders and escalates gradually. Following each step can help you try to preserve your business relationship as much as possible.

1. Send a friendly payment reminder

When payment first becomes overdue, give your customer a courtesy reminder by phone, email or by posting a letter. They might have forgotten about the bill or paid into the wrong bank account, so this first reminder might be enough to get the invoice paid.

Be sure to include payment options, banking details and contact information in your reminder to make it easier for the customer to pay you quickly.

Use our friendly reminder email template if you need help getting started.

2. Send an overdue payment reminder

If the customer misses the next agreed payment date or there's been no response to your first payment reminder, reach out again. Give the customer another call, or send another email or letter reminding them of the money owing and requesting payment.

Use our overdue payment second reminder email template as a reference.

3. Send a final notice

If the customer still hasn't paid and has missed extended payment dates again, call or email to discuss the outstanding invoice and request payment.

Use our final notice email template as a reference.

4. Try to make direct contact

If there's still no payment or response after the final notice, consider visiting the customer in person. If your previous contact has been via email or letter, try phoning them to ask for payment. This could help build a personal relationship with the customer that could be useful for future payments.

Use our follow-up contact script template as a reference when speaking to the customer.

5. Send a formal letter of demand

If all your attempts to contact them and receive payment have failed, consider sending a formal letter of demand. This has the potential to damage the business relationship with the customer, so think carefully before you resort to this option.

Use our letter of demand template as a reference.

6. Consider using a debt collecting agency

If you still haven't been paid, you can consider using a debt collecting agency as a last resort. The agency will try to collect the outstanding money from your customer.

Keep in mind that you and the debt collector must both abide by the laws against banned debt collection practices. You can face criminal penalties if you engage a debt collector who breaks consumer protection laws in trying to recover a debt.

For more guidelines on fair debt collection practices see Dealing with debt collectors on the CAV website and Treating customers fairly: Debt collection on the Australian Competition and Consumer Commission (ACCC) website.

7. Get help with dispute resolution

In Victoria, there are several departments that can help with dispute resolution:

Preventing customer debt

Consider the following tips to help prevent customers owing you money.

Outline your expectations to new customers

It's always good practice to clearly outline your expected terms of trade and payment at the beginning of a customer relationship.

Our new customer engagement template includes a terms of trade paragraph that you can use to include:

  • invoice dates
  • any additional charges for overdue payments
  • debt collection procedures.

Invoice customers efficiently

To encourage prompt payment you can:

  • send invoices out as soon as a job is complete, or on a regular date
  • clearly state all payment options and information on your invoices or contracts
  • keep in regular contact with your customers
  • offer a small percentage discount for early payment.

Find out more about what details to include in an invoice.

Pay commissions when money is received

If your sales staff are rewarded for sales, sometimes they might 'bend the rules' to book another. Make it a policy that you only pay out rewards once the money has been collected rather than when the sale is made.

This kind of policy can encourage staff to pursue payment from customers and improve your cash flow.

Train staff in policies and procedures

It's important that your staff are aware of your business's payment terms, customer invoicing and debt recovery procedures. Ensure your business has a financial policies and procedures manual and that every staff member reads it as part of their induction.

To reduce the possibility of customers owing you money in your business, you can introduce the following processes into your financial policies and procedures:

  • Do a thorough background check on a business before you offer credit.
  • Set safe customer credit limits.
  • Wait until payment clears before shipping or releasing goods.
  • If you're a supplier, register goods with the Personal Property Security Register (PPSR).

Registering goods that you have a financial interest in on the PPSR allows you to recover those goods if you're not paid for them.

Opt for signatories to the Supplier payment code

If selling to another business, check to see if it has signed the Supplier payment code.

Business Council of Australia (BCA) and the Victorian Government developed the Australian supplier payment code to help businesses commit to fast payment to suppliers, improve cash flow and strengthen the economy.

By voluntarily signing up to the code, businesses agree to:

  • pay their suppliers promptly and on-time (within 30 days)
  • cooperate with suppliers
  • help suppliers to improve payment processes
  • engage in fair and efficient dispute resolution.