Unpaid invoices are the silent killer of Australian small businesses. On average, SMEs are owed $40,000+ in outstanding receivables at any given time. Here's a practical escalation framework to get paid — and prevent bad debts in the first place.
1. Prevention: Set Up for Success
- Clear payment terms on every invoice — "Due in 7 days" or "Due in 14 days." Avoid 30-day terms unless the client requires it.
- Require deposits for large jobs — 30–50% upfront before work begins.
- Credit checks for new clients — use services like CreditorWatch or Equifax to assess risk before extending credit.
- Written terms of trade — a signed agreement that includes your right to charge interest on overdue accounts and recover collection costs.
2. The Escalation Timeline
| Day | Action |
|---|---|
| Day 1 overdue | Automated email reminder via Xero |
| Day 7 | Phone call — polite follow-up, confirm they received the invoice |
| Day 14 | Formal overdue notice (email + letter) |
| Day 30 | Final demand letter — state intent to escalate |
| Day 45 | Engage a debt collection agency or solicitor |
| Day 60+ | Legal action (Letter of Demand, NCAT/VCAT, or court) |
3. Using Xero's Invoice Reminders
Xero can automate the first stages of your collection process:
- Set up 3 automated reminder emails — at 1, 7, and 14 days overdue.
- Use the Aged Receivables report weekly to identify problem accounts.
- Add online payment links (Stripe or GoCardless) to invoices so clients can pay instantly.
4. Legal Options
- Letter of Demand: A formal legal letter demanding payment within 7–14 days. Often enough to prompt payment. Cost: $200–$500 from a solicitor.
- Small claims tribunal: NCAT (NSW), VCAT (VIC), QCAT (QLD) — for debts typically under $25,000–$40,000. Low cost, no lawyer required.
- Statutory Demand: For debts over $4,000 owed by a company. If unpaid within 21 days, you can apply to wind up the company. This is a powerful tool.
- Debt collection agency: They typically charge 10–25% of the recovered amount. Best for large volumes of small debts.
5. Writing Off Bad Debts
If a debt is genuinely unrecoverable, write it off before 30 June to claim the tax deduction. In Xero, credit the invoice against a "Bad Debts" expense account. You can also claim back the GST you originally reported on the sale.
Key Takeaways
- Prevention is best — clear terms, deposits, and credit checks upfront.
- Follow a strict escalation timeline starting from day 1 overdue.
- Automate reminders in Xero and add online payment links to invoices.
- A Statutory Demand is a powerful tool for debts over $4,000 owed by companies.
- Write off genuinely bad debts before EOFY and reclaim the GST.