In these infamous credit crunch times, acting quickly can prevent unpaid bills from becoming bad debts.

The first thing you need to do is to follow up on any debt as soon as it is not paid on its due date. Look for changes in payment patterns and consider credit checks on the customer and take up references and see if these are genuine. Whatever you do, telephone the debtor; do not simply send out reminders.

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 - around eight per cent should be fine.

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

The compensation you may be entitled to varies in accordance with the size of the debt: a debt under £1,000 attracts compensation of £40, between £1,000 and £9,999 gets £70, and £10,000 and over, £100.

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. But this will probably not carry the weight of sending a specimen court claim form or serving a statutory demand.

You can download a specimen court claim form from www.hmcourts-service.gov.uk. 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. 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.

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. You can download the relevant forms from www.insolvency.gov.uk. For a company, the form should be sent to the registered office, and it is suggested that a copy is also sent to the trading address, if different. Bear in mind that this is a higher risk strategy; you must be certain that the debt is due and that the debtor has no grounds to dispute it.

If, despite all the above efforts, the debt has still 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 - 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.

For a simple debt claim you might wish to complete the claim form, submit it to the appropriate court and deal with it yourself. 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 judgement in default. This judgement would then need to be enforced.

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.

Ben Hopps is a solicitor in the commercial litigation team at Sykes Anderson LLP. Ben.hopps@sykesanderson.com