Before you chase an unpaid invoice

Most receivables are not disputed. They are simply unpaid, because nothing has yet made paying more attractive than not paying. The instinct is to send everything to a lawyer or to send nothing, and both are expensive. What a ledger needs first is triage.

Check limitation before anything else

For a simple money claim on an invoice, the ordinary limitation period is three years from when payment fell due, and finance teams routinely assume longer. It is worth running the whole ledger against that date before deciding what to pursue, because it will tell you which accounts are still live and which are already gone.

Two things extend it. A written acknowledgement of the debt before the period expires restarts the clock from the date of the acknowledgement, and a signed balance confirmation obtained during an audit can amount to one. A part payment can have the same effect. If you do nothing else after reading this, find out whether your auditors have been collecting balance confirmations, because they may have been quietly preserving your claims for years.

The cheapest recovery tool in existence is a signed ledger confirmation obtained while the relationship is still good.

Then check what you can actually prove

An invoice proves what your accounting system says. It does not prove the obligation. What proves the obligation is the contract or purchase order, evidence of delivery and acceptance, and correspondence that does not concede a dispute where none exists.

Where the paper is thin, the record is usually wider than the ledger. Purchase orders and approvals survive in email long after the file is lost. Delivery is often provable from transport documents, or from the debtor's own tax filings, since a buyer who took input credit on your invoice has told the tax authority it received your goods. A notice sent on a weak file teaches the debtor that the file is weak, so it is worth knowing first.

Choose the route that fits the debtor

• A structured demand sequence. A surprising proportion of aged receivables are paid by a properly escalating series of written demands from somebody who is clearly keeping a record. This costs almost nothing and should be exhausted first.
• A dishonoured cheque. Proceedings under the Negotiable Instruments Act run on short and strict timelines measured from the dishonour memo and the statutory demand. Missing them is not curable, so this is the one route where speed genuinely matters.
• A delayed payment reference. If you are a registered micro or small enterprise, you are entitled to payment within the statutory period and beyond it to compound interest at a multiple of the Reserve Bank rate, which is materially above commercial interest. The reference goes to the facilitation council in your state. Startlingly few eligible suppliers use this, and buyers often settle once the interest exposure is explained to them.
• A commercial suit. Remember that pre institution mediation is compulsory where no urgent interim relief is sought, so a plaint filed without it is exposed.
• Arbitration, where the contract provides for it.
• An insolvency application. Powerful where a corporate debtor genuinely cannot pay and the default is clear and above the threshold. A poor tool otherwise, for the reason below.

Why insolvency is misused

An application by an operational creditor requires a default above the prescribed minimum, a demand notice served first, and no genuine pre existing dispute. That last point defeats a great many applications: if the debtor raised a quality or quantity complaint before your notice, and it is not obviously spurious, the application is liable to be rejected and you will have spent money to be told so.

It is also a blunt instrument against a solvent customer you would rather keep. Used as a threat against a company with a real dispute, it usually costs more than it recovers.

Settle properly or do not settle

Most of these matters end in a settlement, and the difference between a good one and a bad one is not the headline percentage. It is what happens on the second missed instalment.

The term people most regret leaving out is revival of the original claim on default. Settle a hundred at seventy in instalments, receive twenty, and if the settlement replaced the debt and says nothing about revival you are now suing on the settlement for fifty, having given up thirty for a payment of twenty. With a revival and acceleration clause the default puts you back on the full hundred, credited with the twenty. That is a difference of thirty on identical facts, and it costs one clause.

Watch the guarantor too. A full and final settlement with a company, drafted loosely, can discharge the personal guarantee you were relying on, because varying or releasing the principal debt without the guarantor's consent can release the guarantor. Say expressly that the release is confined to the company and that the guarantee survives.

Decide what to write off

The most valuable output of a ledger review is usually the list of accounts not worth chasing: below a certain value, above a certain age, against debtors who have been struck off or dissolved, or on documentation that cannot be proved. Writing those off is a decision, and making it deliberately is cheaper than making it slowly by spending money on them.

It is also the reason to be careful about paying a recovery adviser a percentage of what is collected. An adviser paid that way has an interest in pursuing every account, including the ones you should have closed.