How to deal with an unpaid invoice?

You will be paid for the work you do. But sometimes there are those who refuse to pay their obligations - and trouble ensues. How do you fight against defaulters?

Prevention first and foremost

What's the best way to solve problems with non-payers? Don't let them happen in the first place. And because people are different, it pays to treat the issue of payments carefully when agreeing with business partners. Non-payers may be unavoidable - but if they do occur, you're in a better position when a dispute arises with good preparation.

We recommend that you "check out" a new client at the outset so that you have a better idea of who you are dealing with. Check out their website and social media, read customer reviews. Information from the commercial register and details of the VAT payer's reliability may also be useful.

The basis of the cooperation itself is then to have everything in writing. Therefore, sign a contract with your business partners or at least have them confirm the order by email.

What will deter non-payers?

Interest on late payment

You can either agree on the amount of default interest with your business partner in advance, for example in a contract, or use statutory default interest. Its amount is set by Government Regulation No. 351/2013 Coll., according to which the annual amount of interest is calculated as:

CNB repo rate + 8%

You take into account the rate applicable on the first day of the half-year in which the default occurred. Information on the repo rate can be found on the CNB website.

If you are a business and your debtor is another business or a public institution, you can claim compensation of at least CZK 1,200 for late repayment (even if it is only one day) . However, you should think carefully whether it is worth it to strictly enforce this compensation if you are even a little late - you will damage your relations with each other.

Contractual penalties

When signing a contract with a business partner, you can agree on contractual penalties. These are primarily intended to prevent unfair behaviour by the other party. Always be sure to clearly specify in the text of the contract that the penalty is a contractual penalty and clearly state which obligation the penalty is related to.

Advances

If you provide services, especially for new clients, we recommend that you set a deposit, ideally in the amount of 50-100% of the contract price. Serious clients will have no problem with this - and at least you won't lose money with non-serious ones.

Guarantee

For large commercial contracts, the institution of a "guarantor" is sometimes used, which is a third party who gives a written undertaking to the creditor to repay the debt if the debtor fails to do so.

Security assignment

This is also the most common arrangement in large transactions, where it serves as a guarantee. It works similarly to a pledge, but is more generous to the creditor. The debtor temporarily transfers the agreed property to the creditor - the creditor becomes the owner of the property for a certain period of time. Once the debt is repaid, the property is returned to the debtor. However, if the debt is not duly repaid, the property is permanently forfeited to the creditor.

What if the payment does not arrive?

The logical step is to remind the other party. Mistakes happen, so choose a friendly tone initially and politely ask the client to check the payment. In most billing systems, you have the option to set up an automatic email reminder to be generated after the due date.

If a friendly prompt doesn't work, keep up the reminders and escalate the urgency - it's important to urge the matter regularly so it doesn't fizzle out. With further reminders, you can toughen the tone.

How to recover a debt?

When the worst comes to the worst, and reasonable negotiation with the debtor doesn't help, it's time to take legal action.

1) Pre-action notice

The first action is usually a pre-action notice. In it, you formally invite the debtor to repay their debts within a set period of time and inform them that you are prepared to take the matter to court. In addition to this information, be sure to include identifying information for both parties and details of your claim (how much the other party owes you in total and for what).

The pre-action notice is the last chance for the debtor to resolve everything out of court. It is also an insurance policy for you - by sending the document you will be entitled to the costs of the proceedings if you win the dispute.

According to the Code of Civil Procedure, the pre-suit notice must be sent to the other party (at the permanent address / business address) at least 7 days before the actual filing of the lawsuit. A registered letter with a delivery note is ideal (this will serve as evidence in the event of a dispute). Alternatively, you can also use a data box.

2) Statement of claim / electronic payment order

Did the summons not work? The next step is the lawsuit itself. If you succeed, the court can also order the debtor's execution. However, you should expect the costs of a lawyer as well as the fact that the whole matter will drag on.

The other, often cheaper option, is to file an " electronic payment order " via the Ministry of Justice website. This is basically a shortened procedure that you can use for monetary claims up to CZK 1 million.

3) Working with a collection agency

If you don't want to deal with debt collection yourself, you can approach a collection agency to take care of it for a fee. These are out-of-court debt collectors who are experienced in the field and can help you deal with bad debts effectively.

4) Selling the debt

If you are in a hurry to get the whole thing sorted, you can sell your debt to a specialist firm who will sort it out themselves - and pay you off.

You'll sign an assignment agreement together and transfer the debt to them. Although you will get the money faster, you will lose some of the money - the company will only pay you a percentage of the value of the debt.

When is a debt worth collecting?

The question arises as to when it is effective to collect the amounts owed. As an entrepreneur, you can easily calculate that the cost of collecting an invoice worth several hundred crowns will exceed the debt itself. In such a case, it is usually the most sensible thing to do - and to use the unpaid invoice as a lesson for the future.