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Debt repayment agreements – A guide for business owners

One of the more challenging aspects of running a business is when you find yourself in a situation where a client hasn’t paid their invoice and it leaves your company accruing debt. It can be difficult to know what to do for the best and that will vary depending on the circumstances, but there are different options that you can explore to determine which one is the right fit for recovering what you’re owed.

One of those options could be a debt repayment agreement and in this guide, our business disputes solicitors will explain what a debt repayment agreement is, how they are used and what terms you should include in a debt repayment agreement.

What is a debt repayment agreement?

A debt repayment agreement is a type of repayment plan that you enter into with a client who owes your business money. The aim of this arrangement is for you to recover all of the money that’s owed to you under an outstanding invoice or loan over a period of time, and subject to certain terms and conditions, that you’ll agree with your client at the outset before you both sign it off.

Why would someone enter into a debt repayment agreement?

Whilst there are many different avenues you can investigate when it comes to recovering unpaid debt, the reality is that many of these avenues – including court action – can prove costly and time consuming.

Debt repayment agreements can be a good solution if your customer is struggling to pay you. It’s definitely an option worth considering if you have a long-standing and strong commercial relationship with them that you’d like to continue when the debt is paid off. This is because it demonstrates goodwill and flexibility on your part if your company is in a financial position to allow them that extra time to settle their unpaid invoice or loan.

What types of debts can be covered in a debt repayment agreement?

Almost any kind of debt that gives rise to an unpaid invoice or loan can potentially be covered in a debt repayment agreement, but seeking advice from a business disputes solicitor on this is important because they’ll be able to help you weigh up whether your situation is suitable for this kind of arrangement. If there’s a risk that your client might soon become insolvent, for example, then caution would need to be exercised. Some examples of what types of debts might be covered include:

  • Unpaid invoices of varying amounts
  • Trade debts owed to you
  • Late lease or rent payments
  • Business loans

Are debt repayment agreements legally binding?

Another reason why it’s advisable to take advice from a solicitor before entering into a debt repayment agreement is to make sure that it’s drafted in such a way that it’s legally binding in case things go wrong. This is because for the agreement to be binding it has to meet certain criteria to be classed as an enforceable contract in the eyes of the law. In turn, this means that you can take legal action against your client/customer if they can’t or won’t pay any or all of the debt once you’ve entered into your arrangement

How does a debt repayment agreement work?

The mechanics of a debt repayment agreement should be simple as long as the terms are set out clearly in a written, legally binding document. One of the first things that you and your client will do is agree on what amount they will pay back in increments (usually either weekly or monthly payments, but it’s open to you to come to a different arrangement if that’s more appropriate) and over what timeframe until the debt is paid off. This has the effect of reducing what’s owed to you into manageable chunks for your client with the aim of a steady stream of funds being paid to you while the payments reduce the debt gradually over the course of time at a rate that’s also acceptable to you.

What terms are typically included in a debt repayment agreement?

There are certain terms that should be included in a debt repayment agreement as standard, with anything else you might decide to add as optional extras which can be drafted in to suit your company’s and your client’s particular circumstances. The standard terms typically include:

  • The total amount agreed as outstanding to you and to be paid back
  • A repayment schedule containing details of what sums are due by when and how frequently payments are due to be made to you by the client (e.g. by a set date each month or by the end or beginning of a calendar month, via a standing order or otherwise)
  • Details of what will happen if your client fails to pay any of the instalments
  • Details of any interest that will accrue on late or missed payments, if you choose to include this

Can you charge interest in a debt repayment agreement?

The law permits you to claim interest on late payments from other businesses if you wish to do so – this is referred to as a statutory right. This means that as long as your client is another business or from the public sector (and you aren’t already claiming contractual interest), you’re entitled to charge statutory interest on the unpaid invoice (or another type of debt) which is the subject of the debt repayment agreement. If you do so, details of the interest rate and when it will start accruing should be clearly set out in the agreement. This would usually be if a payment is late or missed but it could also include interest on the principal debt.

What happens if a client misses a payment?

What happens if a client misses a payment under a debt repayment agreement should be clearly set out in the agreement itself so that both you and they are fully aware of the consequences. As missing a payment would most likely be classed as a breach of contract within the agreement’s terms, you’d technically be able to take steps to begin legal action against them to recover the debt by way of enforcing the contract.

What are alternative ways to recover outstanding debt?

Debt recovery can be an expensive and time-consuming process and whether or not a debt is disputed will have some bearing on the right course of action to take. As potential alternatives to entering into a debt repayment agreement, you might decide to pursue the debt through the County Courts, instruct a debt collection agency, serve a statutory demand on the client or petition for their bankruptcy or winding up.


Debt repayment agreements can have many advantages for both your business and a client who owes you money, as long as you’re confident that they can meet the terms of the agreement and that you’ll receive the full amount owing to you over time. Taking legal advice from a business disputes solicitor can prove invaluable in your decision on whether entering into a debt repayment agreement is the best option for you; if it is, then having support with drafting a clear, legally binding agreement minimises the risk of problems cropping up. If you already have a repayment agreement but it isn’t clear and well drafted, alternative options that might be more beneficial for your situation can be explored so that the debt is repaid as quickly and smoothly as possible.

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