Debt Recovery Tips for Small Business


10 October 2017
Posted by Jennifer Tutty and Sebastian Marcu (Studio Legal intern)

As a small business owner, you have to wear many hats. One of these is the “Debt Collector”.  Putting on this hat is certainly not fun but managing your debts and cash flow is essential to running a great business.

If your business is owed money, what’s the best way to go about getting paid?  While your approach may change depending on your working relationship with the debtor or particular circumstances, we have set out some ideas and general advice on debt collecting for small businesses.

Step 1 – The reminder email

The first step is to send a reminder email as soon once an invoice is overdue (with a follow up if the first one did not work).  You should set up a template ‘reminder email’ to make this process quicker and more streamlined.  If you use online invoicing software, these reminders may be automated. The sooner you send a reminder, the sooner you get paid.  Clearly refer to specific invoices which are outstanding, advise that the debt is overdue and set a new deadline (we recommend a realistic period, such as a further week).  Try not to let your invoices get to 30 days overdue, as it becomes increasingly difficult to get paid.

If getting paid promptly is your priority and your business relationship with the debtor is not as important, you can skip this step and go straight to step 2.

Step 2 – Letter of demand

A letter of demand (followed by a final letter of demand if you wish) is the first formal step in debt recovery proceedings. It provides the debtor with a written notice of your claim and serves as evidence of your demands for payment.  To give more weight, letters of demand are often sent by lawyers on their firm’s letterhead. They should clearly state the amount of the debt sought and specify a time period during which the debtor must make payment, and a warning that formal legal action may be taken if the payment isn’t made.

You should attach the relevant invoices to the letter and it should also be made clear to the recipient that the letter is a letter of demand (so use words to that effect in the heading). Make sure that the letter does not contain misleading information, and make sure it does not mimic any court document.  Ideally a letter of demand is emailed, with a copy sent by post (in a manner that can be tracked, such as express or registered post).

If the debtor doesn’t pay or you don’t reach a compromise together, the next step is to consider whether to take legal action.

Step 3 – Legal action

Before instructing lawyers to issue legal proceedings to recover your debt, it is important to consider the costs of these measures and whether pursing the debt is a viable option. Some businesses decide to write off smaller debts, the value of which may be partially recouped via tax deductions. This will depend on your particular circumstances, so ensure that you seek appropriate advice from your professional advisors.

Other points you should consider before taking legal action include whether the debtor has the means to pay, whether there is a dispute as to facts and the strength of your position and whether there is a statutory limitation (6 years).

Court Proceedings (Victoria)

In Victoria, legal action is generally initiated in the Magistrates’ Court for claims under $100,000. Consumer/trader disputes can also be heard by VCAT. The County Court and Supreme Court hear claims where the amount sought is higher than $100,000.

Issuing legal proceedings can be a costly exercise (and you should remind your lawyer to be mindful of costs), but it may be the only chance you have at recovering the debt owed to you and may indeed be worth it if the debt is significant. Often the debtor will cough up once receiving the initial statement of claim (rather than defending the claim).

If your claim is genuine and lodged in a court other than VCAT, you should be able to recover associated legal fees (as long as they are charged according to the correct court scale). This is something you should speak to your solicitor about.

If the debtor defends the matter it will go to hearing. If they remain silent, you may obtain a default judgment. This will negatively affect the debtor’s credit rating.

The court will then consider the issue of enforcement – and with a bit of luck – you’ll finally be paid.

Statutory Demand (Australia wide)

As an alternative and if your debtor is a company, you may like to serve a Statutory Demand under section 459E of the Corporations Act 2001 Cth.  You can issue a Statutory Demand to a debtor company requiring it to pay your debt (which is over $2,000) within 21 days.  If the debtor fails to pay the debt, comes to a suitable arrangement with you or makes an application to the court to set it aside within the prescribed time period, then the debtor company is presumed by law, to be insolvent.  At this point, you are entitled to make an application to wind up the debtor company in the Federal Court or a State Supreme Court.

If the debtor is serious about operating a solvent business, then it will take the receipt of a Statutory Demand very seriously and this could be great leverage to receive payment or at least to negotiate a settlement with the debtor.

Do you need help with recovering a debt? Are you considering legal action? Call us on 03 9521 2128, or email


The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.