Legal vs. commercial approach to debt collection: when each one makes sense

When a company's receivable becomes high-risk, the first thought is often to involve a lawyer. That is understandable: if a debtor has not paid, legal action may seem like the clearest way to compel payment. But in practice, taking the legal route first is not always the fastest or most cost-effective way to recover the money.

There is another option: a commercial approach. Instead of starting with court proceedings, it focuses on direct communication, negotiation and finding a workable solution.

These approaches can be viewed as different tools for different situations. The key is to understand what is happening in the specific case, then decide which route offers the most realistic path to recovery. In many cases, a commercial approach is worth considering before involving a lawyer.

What the legal approach involves

The legal approach generally means instructing a lawyer and pursuing a claim through the courts. The aim is to obtain a judgment requiring the debtor to pay and, if payment is still not made, to enforce that judgment where possible.

When the legal approach makes sense:

• The receivable is undisputed and supported by clear documentation.
• The debtor is insolvent or in bankruptcy, and formal legal steps are needed to protect your position.
• The business relationship has ended and there is little or no scope for an agreement.
• The amount owed is sufficient to justify the potential cost of proceedings.

When legal action may be less suitable as a first step:

• The debtor is in another country, where proceedings may involve additional cost, time and uncertainty.
• The business relationship is still active and worth preserving.
• The receivable is small relative to the likely cost of proceedings.
• The debtor has funds but is not paying for another reason, such as a dispute or an internal delay.

The legal route can be powerful, but it does not guarantee quick payment. In cross-border cases, proceedings and enforcement can be complex and may take months or longer. Even a court judgment does not, by itself, ensure that the money will be recovered.

What the commercial approach is

A commercial approach focuses on direct communication with the debtor and the people who can influence a decision. It involves understanding the reason for non-payment, discussing the available options and negotiating a solution where one is possible.

The aim is not simply to establish who is right. It is to assess whether there is a practical way to recover the debt.

When the commercial approach may make sense:

• The business relationship is still active.
• The debtor is operating and appears to have funds.
• There is room for an agreement, such as a payment plan, instalments or a set-off.
• The receivable is owed by a company and involves a cross-border element.
• Legal action may be expensive or unpredictable.

When the commercial approach may be less suitable:

• The debtor is insolvent or in bankruptcy, and recovery through negotiation is unlikely.
• The debtor has stopped communicating entirely.
• The receivable is undisputed, but the debtor has no funds available to pay.

A commercial approach may be faster, less costly and less disruptive than legal action. It is not suitable for every case, however. Sometimes formal legal steps are necessary.

The key difference

Legal approach:

• Asks: "What is the legal position?"
• May involve lawyers, court proceedings and enforcement
• Can take months or, in some cases, longer
• Can involve significant costs
• May lead to a court judgment
• A judgment does not guarantee that the debtor has funds to pay

Commercial approach:

• Asks: "Is there a workable agreement that can lead to payment?"
• Focuses on direct communication, negotiation and agreement
• May progress in weeks or months, depending on the case
• Can be a more cost-conscious first step
• May lead to a flexible agreement, such as instalments
• An agreement depends on the debtor's willingness and ability to follow through

Both approaches have a place. The question is not which one is better in every situation, but which one makes sense for the specific receivable.

Why a commercial approach can make sense before legal action

When a receivable becomes high-risk, many companies turn immediately to a lawyer. Before doing so, it may be worth understanding whether a direct commercial approach could resolve the matter.

1. The business relationship may still have value

If the debtor is a long-standing client, both parties may have an interest in preserving the relationship. Legal action can put that relationship under considerable strain. A commercial approach may create an opportunity to resolve the payment issue while keeping the business relationship intact.

2. Cross-border legal action can be difficult to predict

Proceedings in another country may involve translations, local legal representation, court costs and an unfamiliar legal system. The process can take months or longer, and the outcome may be difficult to predict. These factors should be weighed against the amount owed and the debtor's ability to pay.

3. Direct communication can open possibilities that reminders cannot

Repeated emails and payment reminders may no longer be effective, particularly if they are being handled through routine processes. A direct conversation with the right person can help clarify what is preventing payment and whether a practical agreement is possible.

4. Legal action is not always the first step

A lawyer can advise on legal rights and help enforce them. But before a dispute reaches that stage, direct communication may help the parties reach a decision or agreement. If that happens, legal action may not be necessary.

When each approach makes sense in practice

A commercial approach may make sense when:

• The debtor is operating and appears to have funds but is not paying for another reason, such as a quality dispute, a delay in an internal procedure or a change in management.
• The business relationship is still active and worth preserving.
• The receivable is cross-border and the legal route may be complicated.
• The receivable is €20,000 or more: an amount that may justify a focused recovery effort, while not automatically making legal action the only option.

A legal approach may make sense when:

• The debtor is insolvent or in bankruptcy.
• The business relationship has ended and there is no realistic scope for agreement.
• The receivable is undisputed, but the debtor refuses to communicate.
• The amount owed is sufficient to justify the cost of proceedings.

These are general considerations, not a substitute for assessing the facts, documentation and applicable law in each case.

What this means for you

If a company owes you money and the receivable has become high-risk, you do not necessarily have to choose immediately between hiring a lawyer and writing the debt off. A commercial approach may be a useful step in between.

It cannot guarantee recovery. But in some cases, direct communication and negotiation can lead to payment before legal action is needed. If they do not, you can then consider whether to proceed through the legal route.

Rather than asking only, "Should I hire a lawyer?", it may be helpful to ask, "Have I assessed all the practical options available before taking that step?"

If you have a receivable of €20,000 or more and standard collection attempts have not worked, it may be worth considering an individual approach focused on the specific case.

That approach starts with analysis, not another reminder.

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If you'd like to learn more about how we approach cases like these, visit alterclaim.rs/en or contact us at info@alterclaim.rs.