When a customer stops paying: the order of things

A good customer going quiet on an invoice is a different problem from a bad customer refusing to pay. There is an order to working out which one you have, and it starts with the contract rather than the phone.

Problems, in order · Part of Outsourced General Counsel

A good customer going quiet on an invoice is not the same problem as a bad customer refusing to pay, and the two need different handling. The first is usually a cash-flow squeeze inside their business, a dispute nobody has told you about, or an invoice stuck in an approvals queue. The second is a decision someone has taken. Until you know which one you have, every step is guesswork — and guesswork is what turns a recoverable debt into a written-off one.

There is an order to this. Worked in sequence, it protects the relationship for as long as the relationship is worth protecting, and it puts you in the strongest possible position on the day it stops being worth protecting.

Read the contract before you make the call

The contract decides the position, and most businesses reach for the phone before they reach for the file.

What you are looking for is narrow. When does payment actually fall due — on invoice, on delivery, on acceptance, or thirty days after a month end that pushes real payment out to sixty? Is there a contractual interest rate, and is it better or worse than the statutory one? Is there a right to suspend supply or services for non-payment, and what notice does it require? Is there a set-off clause, and does it work in their favour or yours? If you supply on your own terms, were those terms actually incorporated, or did their purchase order land last and quietly win the battle of the forms?

This matters because two of the worst mistakes in debt recovery are made in the first week. Suspending supply when the contract does not allow it turns your claim for £40,000 into their counterclaim for lost production. And chasing a payment that is not yet contractually due tells a customer who was going to pay you anyway that you do not know your own paperwork.

Establish what is actually happening

One call, to the person who signs off spend rather than the person who processes it. You are testing for one thing: is this an administrative problem, a cash problem, or a dispute?

An administrative problem is fixed the same day — a wrong PO number, an invoice sent to a person who left, a missing timesheet. A cash problem is negotiable, and often worth negotiating: a written payment plan with a clear default clause is a far better outcome than a judgment against a company with no money. A dispute is the one that matters, because a genuinely disputed debt closes off the fastest route to pressure and opens the slowest one.

Whatever they say, write it down and send it to them. "As discussed, you have confirmed the invoice is approved and payment will be made by the 30th." An email nobody contradicts becomes evidence.

Put the debt beyond dispute in writing

Before you escalate, you want a paper trail that shows the debt is admitted or, at minimum, unanswered. That means a short, unemotional statement of account: the invoices, the dates, the sums, the delivery or acceptance evidence, and a request for payment by a specific date.

The tone here does real work. Anything that reads as a threat invites a defensive response and, sometimes, a manufactured dispute — a complaint about quality that nobody raised at the time, produced solely to slow you down. A factual, dated, itemised account invites either payment or an admission.

Add interest and compensation, and say that you are

Most founder-led businesses never claim what they are entitled to, which is why late payment stays cheap for the people doing it.

Statutory interest on late commercial payments runs at eight per cent above the Bank of England base rate, and the right applies automatically to business-to-business supply — it does not need a clause in your contract. On top of that, you can claim fixed compensation of £40, £70 or £100 per invoice depending on the size of the debt, and reasonable recovery costs above that figure where you have incurred them.

The point is rarely the money itself. It is that a supplier who calculates statutory interest to the day, states it clearly and adds it to the ledger is a supplier who is going to be paid before the ones who do not.

The letter before action

If that does not produce payment, the next step is a letter before action — and it is a formal step, not a strongly worded email.

The courts expect parties to have exchanged enough information to understand each other's position, and to have tried to settle without proceedings, before a claim is issued. A letter before action does that job: it sets out the basis of the claim, the sum, the interest, the documents relied on, what you want, and a reasonable deadline. Get it wrong and a court can penalise you on costs even when you win. Get it right and it is frequently the last document in the file, because it is the first moment the debtor's own advisers tell them the position is not defensible.

Court, and what it is actually for

Issuing a claim is a commercial decision, not a moral one. The questions are whether the debt is genuinely undisputed, whether the company can pay a judgment, and whether the cost and management time are proportionate to the sum. A judgment against an empty company is an expensive piece of paper.

Where the debt is clear and the customer is solvent but slow, the process itself usually does the work. Where there is a real dispute about quality, scope or delivery, the case is about evidence, and the evidence was created months ago in your delivery notes, sign-offs and email chains — which is the strongest argument for keeping that paperwork properly in the first place.

Why a winding-up petition is usually the wrong tool

It is the step people reach for because it sounds decisive, and it is the step most likely to cost you.

A company is deemed unable to pay its debts where a creditor owed more than £750 serves a written demand and the company then neglects to pay for three weeks. That threshold is low, which is exactly the trap: the test for using the procedure is not whether the debt is large but whether it is genuinely undisputed. Present a petition over a debt the company disputes on substantial grounds and you can be restrained by injunction and ordered to pay the costs of it. Advertise the petition and you may have frozen the company's bank account and triggered the very insolvency that guarantees you are never paid.

There are cases where it is the right instrument — an admitted debt, a solvent company, a deliberate refusal. It belongs at the end of the sequence, taken deliberately, and never as a first shot across the bows.

What Dinmore Bell would do

We would start with your terms, not your ledger, because the recovery position is set by the contract long before anyone is late. Then we take the correspondence off your desk: the statement of account, the interest calculation, the letter before action, the negotiation of a payment plan where that is the better commercial answer, and the decision about whether court is worth it. Founders are usually the worst people to run their own debt recovery, not because they lack the argument but because they still want the customer.

What we would also do is the unglamorous part — fixing the terms, the invoicing triggers and the sign-off records so that the next one is a two-week problem instead of a six-month one.

Where a specialist is needed

Issuing and conducting proceedings, and advocacy in court, are reserved activities carried out by instructed solicitors and counsel; where a claim needs to be issued we instruct them and manage the matter against a scope and a budget. Where a customer is heading for insolvency, or a payment plan needs to survive an administration, a licensed insolvency practitioner is the right adviser. Where writing off a debt or recovering VAT on it affects your filing position, that is a question for your accountant or a chartered tax adviser.

Dinmore Bell provides an outsourced General Counsel function for founder-led businesses, owning work of this kind end to end rather than advising on it and handing it back.