Collecting unpaid invoices is hard and expensive work. If not successful through normal accounts receivable processes, instead of calling in costly lawyers and commencing with litigation it may be a much smarter option to issue a letter of demand to your client and seek alternative dispute resolution.
If your collection methods have failed, and you’ve tried all the main avenues, then issuing a letter of demand may make sense. The good news is that you don't need a lawyer to write such a letter, you can do it yourself. You can find a free sample letter here at a Federal Government business website.
A letter of demand simply states how much you are owed, what for and when the invoice needs to be paid. Using the title 'Letter of demand' at the top of the page lets your client know you are serious about getting your money.
A letter coming from you is likely to be far less inflammatory to your debtor than a letter coming from a lawyer or debt recovery agent, which usually contain threats to lodge a credit default listing, commence some form of legal action in a court or tribunal unless the demand is complied with by a set deadline. That can cause your client to react defensively and appoint their own lawyer, and there you have the commencement of a legal dispute, which can be a very costly, time-consuming,stressful issue to resolve. Additionally, you will most likely be left without a customer.
Instead, your letter should state clearly that you want your payment and a date for payment that you will pursue the matter further if you don’t get payment. At this stage, you may raise the option of formal commercial dispute resolution or mediation.
Raising the option of commercial dispute management or alternative dispute resolution (ADR) is an assertive approach, which can reduce damage to and even improve business relationships, and it doesn’t require using costly lawyers.
ADR is a collective term for the ways that parties can settle disputes, with or without the help of a third party. ADR may include strategies such as assisted negotiations, mediation and private arbitration, all alternatives to litigation. There are several firms that specialise in commercial dispute management and their aim is to manage disputes so as to nip them in the bud quickly without damage to the relationship you have with your client.
An important point is that both parties must be willing to adopt ADR, which is a less aggressive approach than litigating and can be far more cost-effective. You may be able to maintain a business relationship if the outcome is acceptable to both parties.
Another thing to note is that commercial dispute resolution advisers can often recommend useful clauses that you can include in your contracts calling for ADR in lieu of litigation. That’s good protection for you from legal costs.
If you were to choose litigation instead to resolve a dispute, the whole process could take up to two years until final judgment and easily over $100,000 of your cash. That’s because courts and lawyers are expensive – and slow to move. And if you lose, you may have to pay not only your costs, but the other side’s. ADR, on the other hand, could cost you less than $10,000 and it’s less risky. So, depending on the size of your debt, it may be commercially feasible to pursue ADR.
Arbitration, for example, offers a timely, private, less formal and cost effective approach for the binding determination of disputes. Importantly, it provides the parties with greater control of the process than a court hearing. For example, you can agree to conduct the arbitration with oral evidence, or with no oral evidence at all. Its up to you. Arbitrations are often conducted without the strict application of the rules of evidence that churn up courts’ times and ring up lawyers’ fees.
In the mean time, if the dispute is causing a cash flow problem, then invoice finance is a great option to help fill the gap. Even better, you can let the financial provider like FactorONE do the accounts receivable while you stick to what you do best: running your business. Many companies are increasingly using invoice finance regularly to improve their cash flow on an ongoing basis, and some find that by outsourcing AR to a professional financing operation can often improve debt turn. This comes down to the fact that the customer knows that the cash will often be better managed using a dedicated service, than by the business themselves which may not have the processes, resources or monitoring capability they need to manage credit effectively and efficiently.
Of course, prevention is always better than the cure and if the business can ensure they have robust credit control processes and a solid paper trail then this will go a long way to minimizing the risk of disputes emerging, as will using a cash flow finance tool such as invoice finance which helps remove the immediate stress out of cash flow issue and provide the business with some ‘breathing space’ to resolve issues with late debtor payment.
