How long do you have to recover debts?
Million’s owed to SMEs in unpaid invoices nationally: how to chase outstanding invoices
Unpaid invoices have been referred to as the “silent killers” of small business by Market Invoice. And, according to statistics compiled by the Small Business and Family Enterprise Ombudsman’s office, 90% of small business failures are due to poor cash flow, with small businesses owed $26 million in unpaid invoices.
“Here in Australia, more and more small businesses are falling victim to the unscrupulous payment practices of some big businesses – and even some governments – that are quite frankly a drag on productivity,” Small business ombudsman Kate Carnell told the Australian Financial Review
“From stipulating unfair payment terms in contracts, to simply not honouring agreed payment times, a number of big businesses are effectively treating the little guys as banks by forcing them to provide interest-free loans in the form of late or unpaid invoices.”
Chasing these overdue invoices severely impacts business resources. The Ombudsman’s office also estimates small business owners spend an average 12 days a year chasing unpaid invoices and 27% of small businesses have been forced to take out loans to pay their suppliers and wages.
So, just how long do you have to recover debts?
Each state has laws governing how long you have to collect a debt, according to each states limitation act however generally you have six years to recover a debt from the date:
- On which the debt first was incurred
- They made the last payment
- They admitted in writing the owed the debt.
The timeframe of six years is generally the same in each state however in the Northern Territory the timeframe can be reduced to 3 years depending on the type of debt. Also if you sue your customer and successfully gain Judgement the timeframe can be extended up to an additional 12+ years depending on the state.
Six years is a long time, and many businesses simply can’t afford to wait this amount of time to collect the debt. Research shows that the longer a debt remains unpaid, the harder it is to settle. It’s important then, to have specific processes in place to ensure you stay on top to limit the amount of outstanding invoices. Many business owners do not have the time or expertise to devote to this and instead choose to engage a debt collection agency to handle this for them.
A good debt collection agency won’t simply just chase outstanding debts, they will be able to:
- Work with you to improve your terms of trade to minimise the risk of overdue invoices occurring. These terms of trade can also specify that that debtor is responsible for any fees paid in recovering the debt – effectively taking that expense out of your hands.
- Will be able to issue a formal overdue account letter.
- Manage and remove the hassle of chasing debt from your customers.
In many instances, the involvement of a debt collection agency will be more than enough persuasion for them to pay the invoice. The statistics show the importance of swift action when it comes to unpaid debts, so while you legally have six years to recover that debt, it’s vital you take steps to collect the debt as soon as possible to improve your chances of recovery.
Whilst it’s great to know and understand how long businesses legally have to collect overdue payments, we at Marshall Freeman prefer to focus on debt prevention to save our clients time and money. Just by adopting a thorough invoicing system will reduce the amount of unpaid invoices, however with the right guidance from professionals you’ll be able to focus on growing your business rather than on chasing money owed to you.
If you have any unpaid debt or would like to speak to one of our collection experts for a FREE debt appraisal, please feel free to get in touch today!