It is the third Friday in a row you have opened your business's bank account and done the same mental calculation. Your largest customer owes you three invoices, the oldest now more than ninety days past due, and every phone call ends with a promise of payment that never lands. The work was done, the invoices were sent, and the debt is real. Yet you are the one deciding whether to keep chasing, offer a discount, or quietly write the amount off.
Every unpaid invoice is an interest-free loan to your customer. Until it is paid, your business is funding their operation: the wages, materials and overheads for work you have already delivered are sitting in their bank account, not yours. Across a handful of debts that becomes a cash flow problem, and a cash flow problem is how otherwise profitable businesses end up unable to pay their own suppliers, employees or the ATO on time.
Debt recovery is also a race against time. In most Australian states a creditor has six years from when the debt falls due to sue on it, so an old debt is not recoverable forever. The longer an invoice sits unpaid, the more likely the customer's business will fail, the customer will disappear, or the paperwork will go missing. And if you have no written terms and no records of what was agreed, a court may not be able to help you even though the debt is genuine. The good news is that most of this is avoidable: a stronger debt recovery process is mostly built before the invoice is ever sent.
A five-step plan to improve your debt recovery
The steps below move from prevention to enforcement. Steps one and two happen before you extend credit, and for a new customer you should do them together. Steps three to five are what you do once a debt exists.
Put enforceable payment terms in your sales contracts
The single most important change you can make is to the contract you sell on. Your terms of sale should state when payment is due, what happens if it is late, how much credit you will extend, how the customer can pay, and who bears your collection costs if you have to enforce the debt.
One point that surprises many business owners: interest does not accrue automatically on an overdue invoice. Unless your contract provides for it, or a court later awards interest as part of a judgment, an unpaid debt does not grow on its own. A clause that charges interest on overdue amounts both compensates you for the delay and gives a slow payer a reason to prioritise your invoice. The same logic applies to a clause letting you recover reasonable debt collection costs, which otherwise come out of the amount you eventually recover.
If you sell goods, add a retention of title clause and register your interest on the Personal Property Securities Register (PPSR). Under ss 62 and 63 of the Personal Property Securities Act 2009 (Cth), a properly registered purchase money security interest (PMSI) can give you priority over your customer's other secured creditors if the customer becomes insolvent, and for goods that are not inventory you generally have 15 business days from when the customer takes possession to register and keep that priority. With a registration in place you can claim the goods back rather than standing in line as an unsecured creditor.
At a minimum, your terms of sale should cover:
- Payment terms: when payment is due, how the due date is calculated, and who to pay.
- Late payment: an interest rate or fixed charge that applies from the due date.
- Credit limits: the maximum amount you will supply on credit and what happens beyond it.
- Cost recovery: the customer pays your reasonable collection and legal costs.
- Security: retention of title and a right to register your interest on the PPSR.
Check who you are dealing with before you extend credit
A debt is only worth as much as the person who owes it. Before you supply a new customer on credit, verify who they actually are. For a company, run a search on ASIC Connect to confirm it is registered, its exact legal name and ACN, and who its directors are. You need the correct legal entity to sue, and you need correct director names if you are taking personal guarantees.
For an individual customer, search the National Personal Insolvency Index (NPII) through AFSA's Bankruptcy Register search, which records bankruptcies and personal insolvency proceedings going back decades. A customer who is already bankrupt changes the picture entirely: their debts are dealt with through the trustee, not through your normal collection process.
Two searches are worth adding if the amounts justify it. First, a PPSR search on the customer's business to see whether their assets are already heavily encumbered, because that will determine what priority you could ever achieve. Second, if you supply large businesses, check their payment behaviour on the Payment Times Reports Register: under the Payment Times Reporting Act 2020 (Cth), large businesses must report their payment terms and practices with small business suppliers every six months, and the reports are public. A customer with a track record of paying small suppliers in 90 days is telling you what to expect before you sign anything.
Before you extend credit, work through this checklist:
- Verify the company's name, ACN and registration status before invoicing the wrong entity.
- Take a signed director's guarantee before supply, not after the debt goes bad.
- Run an NPII search before offering credit to an individual.
- Search the PPSR for existing security interests over the customer's assets.
- Check a large customer's reported payment record on the Payment Times Reports Register.
This is the step most businesses skip, because credit checks feel like friction right up until the first customer defaults. The cost of one bad debt is usually far larger than the cost of checking the next ten customers.
Turn invoicing and follow-up into a system
Chasing debts is rarely the problem. The problem is that chasing happens ad hoc, after the debt is already old. Replace that with a documented process: issue the invoice immediately on supply with a clear due date, and set a follow-up schedule before the invoice is sent. A workable rhythm is a reminder just before the due date, a phone call on the due date itself, and written follow-ups at seven, fourteen and thirty days after. One person should own the ledger so nothing falls between chairs, and every communication should be saved.
Phone calls work where emails get ignored, because a voice is harder to dodge than a message in an inbox. When a customer asks for more time, get the request and the reason in writing, and confirm any agreed extension back to them in writing. That record has two jobs. It is the evidence you will need if the matter reaches court, and a written acknowledgment of the debt can have legal effect on time limits: in New South Wales, s 14 of the Limitation Act 1969 (NSW) provides that an action on a contract cannot be brought more than six years after the cause of action accrues, and a written acknowledgment can in some circumstances restart that clock. A customer who will not put a promise to pay in writing is telling you the debt will not be paid voluntarily.
Give debtors a realistic way to pay
A customer who cannot pay the whole amount today may well pay it over time. Before you write the debt off or issue proceedings, offer a payment plan: agreed instalment amounts, agreed dates, and the interest and fees waived in exchange for the commitment. Put the plan in writing and have the customer sign it, so the arrangement is enforceable and the record is clear. For customers who are able but simply slow, an early payment discount or a small incentive can shift behaviour without any confrontation.
Make it easy to pay. If your invoicing system only accepts bank transfer, offer card and direct debit as well, because the friction of a payment method is a genuine reason invoices sit. A formalised plan converts a dead debt into a performing one and preserves the relationship, which matters when the customer is a long-term client who has hit a rough patch rather than a deliberate non-payer.
The line to hold is between flexibility and a vague promise. A customer who will not commit to amounts and dates in writing is not negotiating in good faith, and the plan will not survive first contact with their cash flow problems. If they will not sign, move to formal escalation.
Escalate in the right order: demand, then court
When communication stops, escalate formally. The first step is a letter of demand: the amount, what it is for, when it must be paid, and what you will do if it is not. Give a reasonable deadline, usually fourteen to twenty-eight days. A demand demanding payment the next day is more likely to be ignored than obeyed, and an unreasonable demand looks bad later.
If your customer is a company and the debt is due and payable and at least $4,000, a statutory demand under s 459E of the Corporations Act 2001 (Cth) is a much stronger step. The company has 21 days from service to pay the debt or apply to have the demand set aside, and if it does neither it is presumed insolvent under s 459C, which can lead to an application to wind the company up. The consequences for the debtor are serious, which is why the demand must be in the prescribed form, verified by affidavit and properly served; a defective demand can be set aside, so have a lawyer prepare and serve it.
For individuals, recovery runs through the state and territory courts and tribunals. Which forum has jurisdiction depends on the amount of the debt and where the debtor is, and winning a judgment is only the first step: enforcing it, through garnishee orders, warrants or bankruptcy proceedings, is a separate process with its own costs and delays.
Throughout the process, keep your collection conduct professional. Section 50 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law) prohibits undue harassment or coercion in connection with the payment for goods or services, and the same conduct can be a criminal offence. A frustrated business owner applying genuine pressure is one thing; repeated calls at all hours or threats are another, and a harassment complaint can turn a valid debt into a regulatory problem.
Where a lawyer fits into your debt recovery process
Much of this you can do yourself, but the points where the law bites are where a lawyer earns their fee. A legal practitioner would typically take these steps if you brought your debt recovery process to them:
- draft or review your sales terms, credit applications and director's guarantees, so your payment, interest, cost recovery and security clauses are enforceable rather than aspirational;
- register your PPSR interests and advise on priority, including the 15 business day timing rules for a PMSI;
- run the ASIC and AFSA searches for you and interpret what they mean for the particular debt;
- prepare and serve letters of demand and statutory demands in the correct form, with the correct verification;
- advise which court or tribunal has jurisdiction, whether the debt is worth pursuing, and whether a limitation period is close to expiring;
- issue proceedings if the debt is not paid, and then enforce a judgment through garnishee orders, warrants, bankruptcy notices for individuals and winding-up applications for companies.
A lawyer is also the right person to assess a disputed debt. If the customer argues there is a genuine dispute about what was supplied or what was agreed, that changes the strategy entirely, because a statutory demand can be set aside where a genuine dispute exists. Knowing whether you are dealing with a refusal to pay or a real disagreement is the difference between a quick recovery and an expensive one.
Debt recovery is decided before the invoice goes out
The outcome of most debt recovery is fixed before the invoice is sent. The contract decides whether you can charge interest and recover costs. The credit check decides whether you would have extended credit at all. The system decides whether follow-up happens while the debt is young and the relationship is warm. By the time you are drafting a letter of demand, you are mostly administering decisions made, or not made, months earlier. The businesses that get paid are the ones whose terms, credit checks and follow-up systems do the work before the debt ever exists.
To recap: put enforceable payment terms in your sales contracts and register your security interests, verify every new customer before you extend credit, systemise invoicing and follow-up with written records at every step, offer workable payment plans to customers who cannot pay in full, and escalate through a letter of demand and, for company debts of $4,000 or more, a properly prepared statutory demand. Keep collection conduct within the bounds of the Australian Consumer Law, and bring a lawyer in at the drafting and escalation points, where the cost of getting it wrong is highest.