The first time an invoice goes past its due date is rarely a crisis. The tenth might be. For most small businesses the trigger is cash flow: a supplier bill is due, payroll is coming up, and money that should have landed weeks ago is still sitting in someone else's account. That is the point where chasing payment stops being a bookkeeping chore and becomes a process worth running properly.
Done well, the process takes an overdue invoice to a recovered payment, or to a clear-eyed decision that a particular debt is not worth chasing. One assumption needs correcting before you start: winning in court is not the same as getting paid. A judgment confirms the debt, but collecting the money is a separate step that usually needs its own action. The process below covers both.
Before you start: what to have in hand
Have the following in hand before you make the first approach to the debtor:
- The debt is actually due: Confirm the invoice date, the agreed payment terms, and that no credit, discount or set-off applies. Demanding money that is not yet due is the fastest way to damage a customer relationship.
- The paperwork that proves the debt: The contract or terms of trade, quote, purchase order, invoice, and evidence that the goods or services were delivered or performed. This is the prerequisite most businesses discover they are missing.
- The correct legal identity of the debtor: A company (check the ACN), a sole trader, or a partnership. An invoice made out to a trading name or the wrong entity can make enforcement difficult.
- A record of your attempts to contact the debtor: Emails, notes of phone calls, and any payment plan already agreed. Courts and mediators expect to see that you tried to resolve the matter before escalating.
- A view on the relationship: Whether this customer is worth keeping affects how far you push at each stage.
- An eye on the clock: In NSW, an action on a contract must be brought within six years of the debt falling due: s 14 of the Limitation Act 1969 (NSW). Similar limitation periods apply in the other states and territories.
Two prerequisites trip people up more than any others. The first is proof: if you cannot show the debt existed and was due, nothing later in the process works. The second is identity: money is owed by a legal entity, not a trading name, and suing the wrong entity wastes time and filing fees.
The recovery process, step by step
The process moves through a series of escalating steps. Each one is an opportunity to be paid without needing the next, and each one builds the record you will need if the debt ends up in court.
Audit your accounts and flag overdue invoices
Start by knowing what is actually owed to you. If you use cloud accounting software, your aged receivables report will list every invoice and how long it has been outstanding. If you do not, the review is manual, but the question is the same. Run it on a regular cadence, at least monthly, and let it surface:
- Overdue invoices: which ones, and by how long
- Key customers: which ones owe the most, and whether the relationships matter
- Limitation risk: which debts are old enough to be at risk
Recovery is easier while the invoice and the work behind it are fresh in the customer's mind. Debts that sit for months are harder to recover, not because the law changes, but because the trail goes cold.
Confirm the debt against your contract
Before you contact anyone, pull out the contract, terms of trade or written quote and check what it actually says. You are confirming three things: the agreed payment terms and due date, the exact amount owing, and whether the contract lets you charge interest on late payment or recover collection costs. If your agreement is oral or partly oral, it is still enforceable, but only if you can prove what was agreed.
This step protects you from asserting an incorrect debt. If the amount is wrong, or the invoice is not yet due, the customer has an easy reason to stop taking you seriously, and the relationship takes the damage.
Contact the debtor directly
The next step is a conversation. A phone call, email or face-to-face meeting often reveals that the invoice was lost, the accounts payable process slipped, or there is a genuine dispute that needs airing. Be prepared to name the amount, the invoice and the date, and come with a payment date or a payment plan in mind.
If the conversation is by phone or in person, follow it up with a short email confirming what was discussed and what was agreed. This is not formality for its own sake. If the debt is not resolved, that email is part of the record you will rely on later. The best outcome at this stage is a commitment to a payment date, or a payment plan the customer can actually meet.
Send a letter of demand
If the conversation does not produce payment, put the demand in writing. A letter of demand sets out the debt and gives the customer a final chance to pay before you escalate. It does not have to be drafted by a lawyer, but it should be clear. A good letter of demand includes:
- The debt and how it arose: the invoice number, date and amount
- The attempts you have already made: the steps taken to recover the money
- A deadline for payment: usually 7 to 14 days, and what you will do if the deadline is not met
The customer will typically do one of three things: pay, come back with a counter-offer such as a payment plan or a lesser sum, or ignore the letter. A counter-offer is progress and is worth engaging with. Silence is also information: it tells you the debt will need escalation.
If the debtor is a company and the debt is at least the statutory threshold, a lawyer may recommend a statutory demand under the Corporations Act 2001 (Cth) in place of or after the letter of demand. If the company neither pays nor has the demand set aside within the statutory period, it is presumed insolvent, which is a powerful lever for a creditor owed a genuine debt.
Try alternative dispute resolution
Before filing anything in court, consider alternative dispute resolution (ADR). Mediation and conciliation are the common forms. In both, a neutral third party helps you and the customer identify the issues and work toward an agreement, without the formality, cost or delay of a court hearing. ADR is generally quicker and cheaper than litigation, and you keep more control over the outcome. NSW courts routinely refer civil disputes to mediation, so it is often a stage of the process rather than an alternative to it.
If you are a small business, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) runs a free online Dispute Support tool that points you to the most appropriate low-cost resolution service in your area, including its own mediation service.
Start court proceedings in the right court
If ADR does not resolve the matter, the next step is a court application. In NSW, the court you file in depends on the amount you are claiming:
- Local Court, Small Claims Division: money claims up to $20,000
- Local Court, General Division: claims up to $100,000, and up to 20 per cent more if the parties consent
- District Court: claims up to $1,250,000
- Supreme Court: claims above $1,250,000
The limits come from s 29 of the Local Court Act 2007 (NSW) and s 4 of the District Court Act 1973 (NSW). They are higher than many business owners assume: the small claims ceiling in NSW is $20,000, not the $10,000 that older guides quote, and the District Court limit was lifted to $1.25 million in late 2022. If you are outside NSW, check the local, magistrates or district court in your state, since limits and procedures differ.
For a debt claim, you start proceedings by filing a statement of claim or application with the court and paying the filing fee. In the Local Court's Small Claims Division the process is deliberately informal. The rules of evidence do not apply, the proceedings are conducted with as little formality as possible, and the court has no power to award costs except in limited cases: ss 35 and 37 of the Local Court Act 2007 (NSW). After you file, the court lists the matter for a pre-trial review, a conference aimed at settling the dispute without a hearing. Only if that fails does the matter go to a hearing, where you must prove the debt. The court may also include interest up to judgment in the amount awarded.
Enforce the judgment
A judgment in your favour does not put money in your account. It creates a judgment debt, and collecting it is a separate step. Under Part 8 of the Civil Procedure Act 2005 (NSW), the main options are:
- A writ for the levy of property: the Sheriff seizes and sells the debtor's property to satisfy the debt
- A garnishee order: the court attaches debts owed to the debtor, including money in a bank account, or wages and salary, and redirects them to you
Before spending money on enforcement, ask whether the debtor can actually pay. A judgment against a company with no assets and no trading activity may be worth less than the paper it is written on. Enforcement options differ between states, so check the local court's process where the debtor is located.
Where the process typically stalls
Most failed recoveries stall at one of four points:
- Missing paperwork: If you cannot prove the debt, the letter of demand is ignored, the mediator has nothing to work with, and the court application fails. The fix is in the prerequisites, before the process starts.
- Waiting too long: Debts get harder to recover as they age, and after six years in NSW the limitation clock can extinguish the claim altogether.
- Chasing the wrong entity: Suing a trading name, or an individual when the contract was with their company, wastes time and money and may leave you with a judgment you cannot enforce.
- Assuming judgment means payment: Without a follow-up enforcement step, a judgment is just a piece of paper.
Where a lawyer fits into the process
Most of the early steps in this process can be run without a lawyer, but professional help becomes valuable at specific points. A lawyer can:
- Assess the debt before you escalate: Review the contract and the evidence, and give an honest view on whether the debt is provable and whether the debtor is worth suing.
- Draft the letter of demand or statutory demand: A properly drafted demand is harder to ignore and sets up the next step correctly.
- Manage the court process: Identify the correct court, prepare the statement of claim, meet procedural deadlines, and run the small claims or general division matter for you.
- Run enforcement: Advise on the best enforcement method, apply for garnishee orders or writs, and pursue options such as examining the judgment debtor about their assets.
A lawyer's other role is commercial. Going to court costs money and time, and there is no guarantee of recovery even with a judgment. Advice on whether a particular debt is worth pursuing at all is often more valuable than the drafting.
The record you keep decides the recovery
The step that decides most debt recoveries is the one that happens before the debt is even overdue: the quality of the record you keep from the day you send the invoice. If you can prove the debt, when it fell due, and what you did to chase it, every later step works. The letter of demand has something to point to, the mediator has something to work with, and the court can hear the claim. If you cannot prove the debt, the process stalls no matter how far you push it.
Run the process in order: audit your accounts, confirm the debt against your contract, contact the debtor, put the demand in writing, try ADR, and only then start court proceedings in the correct court. Remember that a judgment is not payment, and that enforcement is its own step. Keep your records complete, act while the debt is fresh, and get legal advice before you commit to litigation.