Bad Debts : How to avoid them in Business

1 September 2025 in Debt Recovery | 4 min read | skip to FAQs

Effective debt management is essential for any business to succeed. One of the most common problems businesses face is outstanding debts. When customers or clients fail to pay their bills, it can impact a business’s cash flow, causing them to struggle to pay their own bills. That is why having a clear message and the ability to manage debt effectively is crucial. Any business can minimise the need for debt recovery by implementing a few simple credit management strategies. This article provides some tips for business owners that will assist in minimising unpaid invoices. We also examine the legal processes involved in debt recovery.

Strategies to avoid Bad Debts 

Structure of Payments

Businesses that provide goods or services that involve long lead times or delivery over extended periods should structure payments from clients to ensure that payments are received early and prior to the business incurring expenditure, such as ordering materials.

Frequency of Invoices

Businesses should ensure invoices are issued frequently. Regularly issuing invoices ensures that clients are aware of the work being done and the amount owed. Allowing work in progress to accumulate may result in clients being surprised by the size of any invoice and being less inclined to pay the invoice.

Explanation of Invoices and Payment Incentives

A clear explanation of what product or service the invoice reflects increases client confidence and can encourage payment. To further encourage payment, offering a financial discount or other positive incentive for prompt payment may be useful.

Follow Up to Bad Debts

Businesses should follow up unpaid invoices immediately. Our experience shows that invoices that are allowed to become aged are much less likely to be paid. There is also the risk that any debtor becomes more difficult to locate. Businesses should have a system of identifying unpaid invoices and a well defined process in place on how these are followed up, including who is responsible for this identification and action. One option is having a scheduled time to check on the status of payments and having a standardised guideline with escalating requests for payment. For instance;

1. A friendly email reminder for payment
2. A telephone call requesting payment, perhaps offering a payment plan if the person is financially struggling
3. A stern email and letter requesting payment
4. A sterner email and letter threatening legal action
5. Legal action by an experienced debt recovery lawyer.

The time between each escalation depends on individual factors of the business, including the amount owed and the existing relationship of the business to the debtor.

Security

In circumstances where businesses provide clients with credit or long periods to pay invoices, it is worth considering taking security to enforce payment. Security may take the form of security over personal or business assets registered on the Personal Property Security Register (PPSR), bank guarantees, letters of credit (useful in overseas transactions), mortgages, personal guarantees, parent company guarantees and the like. BSM Sydney Lawyers can advise businesses on the appropriate security.

Overseas Transactions

Businesses selling goods or services overseas should ensure that there are appropriate security arrangements in place to ensure payment can be enforced, such arrangements include bank guarantees or letters of credit. Businesses selling goods or services overseas should also ensure that all contracts include a clause that the jurisdiction of the contract is within Australia.

What happens if I still have Bad Debts?

The above strategies can improve a business’s cash flow, reduce financial stress and improve customer relations. However, in some circumstances payment may still not be made and in those circumstances BSM Sydney Lawyer can assist with debt recovery strategies.

Debt Recovery

Even businesses that implement excellent credit control can have bad debts. In those circumstances debt recovery procedures should be implemented promptly. The experienced lawyers at BSM Sydney Lawyers can help any business recover bad debts using the debt recovery and enforcement processes of the court. These processes also provide an effective foundation for negotiation by an experienced lawyer.

The debt recovery lawyers at BSM Lawyer Sydney recover over 90% of debts without the need for litigation.

The legal steps in Debt Recovery

1. Negotiation, which we continue throughout the formal debt recovery process.
2. Letter of demand is fast and effective in 75% of our debt recoveries. This is sent to the debtor, and outlines the debt and when it must be paid. It states that further legal action will be taken if payment isn’t made.
3. Statement of Claim which is filed with court and served on the debtor who then has 28 days to pay or mount a defence.
4.  A default judgement is a judgement awarded by the court when the defendant doesn’t file a defence. This is recorded on the defendant’s credit file and allows the plaintiff to enforce the judgement. Once you have obtained a judgement from the court, this judgement is valid and available for enforcement for 12 years.
5. Litigation is the term used to describe civil proceedings, that is, not in a criminal court. It involves the preparation and service of evidence and a formal hearing in court by a judge or magistrate. The vast majority of Brander Smith McKnight’s debt recovery matters are successfully recovered without the need for litigation. However, our lawyers are experienced in all jurisdictions, (being Local, District and Supreme Courts) and rarely require the additional expense of a barrister.

Enforcement of Judgement

In some circumstances the debtor refuses to pay. If this occurs, our debt recovery lawyers can develop a strategy using the available debt enforcement methods to recover your debt, including garnishee orders and a writ for levy.

How can BSM Sydney Lawyers assist you?

The debt recovery lawyers at BSM Sydney Lawyer can advise you on techniques to avoid bad debts. Our experienced lawyers are also able to pursue bad debts effectively using both negotiation and defined legal steps. We consistently recover 75% of bad debts with simple letter of demand. Our senior lawyers offer a free 20 minute consultation to discuss your individual case and formulate a plan for you.

FAQs

BSM Lawyer Sydney has conveniently located offices in Sutherland, Sydney CBD, Parramatta, Shellharbour and Wollongong.