The first thing you need to do is to follow up on any debt as soon as it's not paid on its due date. As you do this, look for changes in payment patterns, for example if the debtor takes longer to pay than previously.

Beware extending credit beyond a level you are comfortable with. If it's feasible for your business, make credit checks on the customer and take up references and see if these are genuine.

Whatever you do, telephone the debtor; don’t simply send out reminders. People are more likely to pay and less likely to come up with excuses for not paying when they are being hassled on the telephone.

You will also get a better idea of whether you are likely to get paid, whether the debtor is genuine, whether they might be in trouble, or whether they are looking to avoid payment.

Charge interest
You are entitled to charge interest on outstanding amounts. Your standard terms of business should provide for interest to be payable on late payment. This must not be so high as to be considered to be a penalty rate of interest, but if you stick to around 8% this should be fine.

You can also claim compensation and interest under the late payment of Commercial Debts (Interest) Act 1998. Under this act, all business owners and managers can claim reasonable debt recovery costs and following an amendment in 2002, can benefit from the simplification of the calculation of statutory interest.

Additionally, small and medium sized enterprises can ask a representative body to challenge grossly unfair contract terms used by their customers which do not provide a substantial remedy for late payment of commercial debts.

The compensation you may be entitled to varies in accordance with the size of the debt: a debt under £1000 attracts compensation of £40, between £1000 and £9999, £70 and £10000 and over, £100.

The interest you can legitimately claim varies depending on when the debt was first incurred but can be as much as 13.5% from the date the payment fell due to when it is paid. It can be difficult to charge interest in practice, but sometimes you need to use whatever weapon you can to put pressure on the debtor.

You should also consider a 'seven day letter'. You can send a letter threatening to issue court proceedings if the debtor does not pay, typically, within seven days. To be more effective, this would need to come from a solicitor but you are then starting to incur additional costs. Even then, whilst this is a step worth taking, it will probably not carry the weight of sending a specimen court claim form or a serving a statutory demand.

You can download a specimen court claim form from hmcourts-service.gov.uk This is fairly simple to complete. You can then write to the debtor attaching a copy of the draft claim form saying that you are ready to issue proceedings and will do so unless payment is made immediately.

You will need to consider whether you will issue a claim if your bluff is called, but this can be very effective. A word of caution: you need to be very careful that you make it clear that a claim has not been issued, and that the form is simply in draft, otherwise misrepresenting that this is some official court paper could get you into trouble.

Statutory demand
One of the most effective methods of putting pressure on a debtor who has the money to pay you but chooses to put you lower down the list of priorities is to serve a statutory demand.

The debt must be for £750 or more. These demands are effectively a warning that unless the debtor pays within 21 days you will take bankruptcy or liquidation proceedings against them.

There are different forms, depending on whether the debtor is an individual, a partner or sole trader, or whether the debtor is a company. You can download the relevant forms from insolvency.gov.uk

There are some formalities to be complied with and the form should be dated and signed. For a company, the form should be sent to the registered office - this can be checked on the Companies House website companieshouse.gov.uk - and it's suggested that a copy is also sent to the trading address, if different.

For an individual, strictly speaking, the demand should be served personally, but initially you may simply want to post it to them as a practical and cheaper option. Please bear in mind that this is higher risk strategy and you must be absolutely certain that the debt is due and that the debtor has no grounds to dispute it.

If the debtor disputes the debt, they can apply to the court for it to be set aside, which could involve you in having to pay their costs. If you are satisfied that the debt is undoubtedly due, this is a highly effective tactic.

Legal action
If despite all the above efforts the debt still has not been recovered, you then need to consider whether to take more formal legal action.

An important feature is whether it is worth spending money on going down this route which is likely to involve the use of solicitors, or possibly some debt collecting agency, or whether you will simply be throwing good money after bad. This will depend on matters such as the amount outstanding and your assessment of the financial position of the debtor, the likelihood of recovery and, weighed against this, the likely cost. It is worth making enquiries about their status.

For a simple debt claim you might wish to complete the claim form, submit it to the appropriate court and deal with it yourself. However, you may prefer to leave this to a solicitor who has experience in this field, because although in theory the process can be simple, in practice there are often administrative and other pitfalls for the unwary.

There is a court fee which depends on the amount being claimed and which starts at £30 for claims up to £300. If the claim is less than £5,000, this is treated as a small claim and therefore you would not normally recover legal fees other than very limited fixed fees. If the debtor does not defend the claim you should be able to apply for judgment in default. This judgment would then need to be enforced.

Bankruptcy
Bankruptcy or liquidation of the debtor is where you can get into more serious levels of fees, and these steps should only be taken with professional advice. You would need to be reasonably certain that the debtor has the means to pay.

The key is acting quickly and firmly, which will prevent the level of debt rising to a level where you are putting your own business at risk, look out for warning signs and to take immediate action as soon as you can see there is a problem occurring.

If there is sufficient at stake then it will justify the use of solicitors, but in many cases you will be able to apply pressure by using some of the techniques outlined above, and to show that you are serious. You need to be pushy to make sure that you are more likely to be paid. Remember, the debtor is likely to have other debts and you want to put yourself at the top of the priority payment list.

You do, of course, have to bear in mind that the commercial reality of whether you want to potentially alienate what may be good or large customers, but then ultimately if they do not pay, or are so slow in paying that your business is at risk, are they good customers?

Ben Hopps is a Solicitor in the commercial litigation team at Sykes Anderson LLP