Not being paid for services or goods provided can be distressing and disruptive, but fortunately businesses can recover the money owed by making small claims for unpaid invoices.
As well as negatively impacting your business’ cashflow, your operations can be affected by late or non-payments. For example, you might be unable to buy stock or pay workers until payment is made. If you’ve done the work or provided the goods as agreed, you deserve to get paid, so in this article we’ll tell you everything you need to know about making a claim for an unpaid invoice. When you’re ready to make a claim, CaseCraft’s AI-powered platform can help you to do so with a minimum of fuss.
Deciding to take legal action on an unpaid invoice
Taking any form of legal action is not something that should be done lightly, but if you have exhausted other avenues then it is entirely appropriate to do so and you may consider going to small claims court for resolution of the unpaid invoice. We’ll explore some of the ways you can try to prevent payment disputes from happening in the first place later in this article, but even once it’s become clear that the other party is withholding payment, there are steps you can take before embarking on the legal route.
If the due date for an invoice has passed you should first send a polite reminder to the customer that their payment is overdue. Be sure to include specific information, such as the invoice number, the amount that they need to pay and the deadline that was originally agreed upon. You should also provide details of how they can pay, and give your contact details in case they need to discuss the matter.
Once some time has passed since you sent your initial reminder, if you still haven’t received payment then you can send additional, firmer correspondences (and it may help to communicate with different means, such as telephone rather than email). If the customer responds but is unable to pay immediately, you might consider offering a payment plan or agree on other flexible but clearly defined options for resolving the matter.
In the event that the customer is still refusing to pay or not acknowledging your communications, you should send a ‘Letter Before Action’, outlining your intentions to proceed with a legal claim for the unpaid invoice. This should include all relevant details of the debts owed, the deadline by which you expect payment and instructions on how to pay.
If the company or person doesn’t agree to pay following this letter, you can begin legal action to recover the debt.
Starting legal proceedings
In the UK there are several different ‘tracks’ in the county court that you can use to recover your money. If your claim is for £10,000 or less (or up to £5,000 in Scotland or £3,000 in Northern Ireland) you can make a small claim for the unpaid invoice. This is the most commonly used track for unpaid invoices, but if your claim is for a larger amount (between £10,000 and £25,000) then you will have to go through the ‘fast track’. For amounts greater than £25,000 and for complex cases, the ‘multi-track’ can be used (or the recently introduced ‘intermediate track’, for claims up to £100,000 that aren’t complex enough to require the ‘multi-track’). For the purposes of this article, we’ll focus on using small claims court for unpaid invoices.
The first step when making a small claim is to fill out the required claim forms and send any appropriate evidence of the unpaid money, such as a copy of the invoice itself, contracts you have, and letters or emails requesting payment. You can streamline the process of starting your submission to small claims court for the unpaid invoice by using CaseCraft’s expert-designed small claims platform.
If one person or company owes you for multiple invoices, you can include these in the same claim, provided that the total value of the combined debts is £10,000 or less.
How much does it cost to take legal action?
Small claims court is intended to offer an inexpensive and streamlined legal process when claiming for relatively small amounts of money, so costs are generally low. The exact amount will vary depending on factors such as the size of the unpaid invoice claim and any additional costs you incur if a court hearing is required (such as travel expenses).
When you make a small claim for an unpaid invoice you will have to pay court fees depending on how much you are claiming for. For example, the fee for an invoice valued between £500 and £1,000 is £70, while the fee for claims between £5,000 and £10,000 is £455. The amounts are laid out in the government’s page on court fees.
Unlike some other legal claims at county court, most costs are not recoverable in small claims court even if you win, beyond certain fixed costs and court fees (with a few exceptions, such as in the case of ‘unreasonable behaviour’). For this reason, it’s generally not economical to hire legal representation, nor is it necessary. CaseCraft’s advanced AI technology can help keep your costs low, as only a small processing fee is required up-front, followed by a modest 10% success fee if you win.
Minimise the risk of payment disputes
If you want to avoid the need to go to small claims court for unpaid invoices, there are a number of steps you can take:
- Prepare a contract – Have a contract in place which formally lays out in writing mutually agreed terms such as when the goods or services will be delivered, when payment should be made by and any details of penalties for late payments. While this may not prevent the need to pursue outstanding payments legally, it will ensure that all parties are aware of their obligations, and make your claim for an unpaid invoice easier to prove. It’s important to note though, you can still make a claim even if you don’t have a formal contract, if you can prove that an agreement was made verbally or through emails and letters.
- Pursue payment – Have a system in place for chasing late payments and making it clear that you expect to be paid in a timely manner. You might begin with friendly email reminders close to the payment due date, escalating to firmer requests when the date passes. Often this may be enough, and it’s always possible that the customer may have forgotten or been ill. When chasing outstanding money, make it clear which invoices you are referring to.
- Request a deposit – Asking for a deposit is particularly useful for larger projects as not only does it guarantee that you receive some of the money early, it can be used as an indicator that the client is able and willing to pay promptly.
- Do a credit check – Provided you have the customer’s consent, you can run a credit check to help ensure that they are able to pay for your services before you provide them. You can do this by obtaining a credit report from a reputable credit reporting agency such as Experian.
How long should you wait for an invoice to be paid?
It’s always best to establish specific payment terms with the customer, but if these have not been agreed then the law states that an invoice is late 30 days after issue (the date on the invoice), or after you provide the services if this is later. Even after this, you should continue to follow up with requests for payment and only resort to small claims court for unpaid invoices when it’s clear that payment is not forthcoming.
According to the Limitation Act 1980, in order to make a claim for late payment you must begin legal action within six years of the invoice due date. After this you will be unable to make a small claim for your unpaid invoice.
Charging interest on overdue invoices
Charging interest can be an effective way of deterring late payment, as well as a way to compensate your business for losses incurred by the delay. Interest begins to accrue once the payment becomes late and can be charged for each day after it has become overdue.
If you have previously agreed an interest rate on late payments contractually you can charge that, otherwise you can charge individual customers the statutory interest rate of 8%. If the debt is owed by another business then the statutory interest rate is set at 8% above the Bank of England’s base rate (which fluctuates), as set out in the Late Payment of Commercial Debts Act 1988. If your agreed rate is lower than the statutory rate you can only charge the lower rate.
Interest can be charged for every day that the payment is late, up to a six-year maximum, and businesses have up to 60 days to pay the interest they owe.
When making a claim for an unpaid invoice in small claims court you can claim for any interest owed as well as the initial figure. When providing evidence for your claim you should be clear on the legal basis for this and whether the interest owed is contractual or statutory. You must state explicitly that you wish to claim for interest.
When Is It Worth Pursuing Legal Action?
If all other avenues for pursuing the invoice debt have failed and the other party has ignored or refused the requests for payment you send, it may be time to initiate legal action. Even then though you should be sure that it’s worth your while to make the claim.
Before going to small claims court for an unpaid invoice, check that it’s likely that you will be able to recover money if you win your claim. For instance, do your research to ensure that the company is still in business and able to pay, or that the person in question is not deceased. If the company is insolvent and owes your more than £750 you may still be able to recover part of your money through a ‘winding up petition’, though as you may not receive the full amount you should consider this in your calculations. This should be considered a drastic course of last resort, and only with legal advice.
If you’ve decided that making a small claim is right for you, CaseCraft can help you to deal with it swiftly and cost-effectively.
