Does the Pre-Action Protocol for Debt Claims affect how an invoice finance provider collects debts?
Only for some invoices. The Pre-Action Protocol for Debt Claims applies when a business is chasing a debt from an individual, including a sole trader. It does not apply to business-to-business debts unless the debtor is a sole trader (the protocol, paragraph 1.1). Most invoice finance is for invoices to limited companies, so for those the court's general pre-action rules apply instead.
If the customer is an individual or sole trader
The creditor must send a letter of claim with set information and a reply form before going to court. If the debtor does not reply within 30 days of the date on the letter, the creditor may then start court proceedings (protocol, paragraph 3.4). If the matter does reach court, the court will expect the protocol to have been followed and will take any failure into account when it manages the case (paragraph 7.1).
If the customer is a limited company
The Practice Direction on Pre-Action Conduct applies. The creditor should write with brief details of the claim, and the debtor should reply within a reasonable time: the Practice Direction says 14 days in a straightforward case and no more than 3 months in a very complex one (paragraph 6). These are court rules for England and Wales.
What it means if you use invoice finance
With factoring, the lender usually chases your customers and decides whether to take court action, so it handles these steps. With confidential invoice discounting, you normally chase your own customers. Either way, read your agreement to see who is responsible for collections and legal action, and tell the lender if any of your customers are sole traders, as the extra protocol steps apply to them.
Related questions
Does it matter if a collection agency does the chasing?
The same rules apply whoever sends the letters. If the debtor is an individual or sole trader, the protocol steps still need to be followed before a court claim. Ask your lender how its collectors handle this.
What if the debtor does not reply within 30 days?
Under the protocol, if the debtor does not reply to the letter of claim within 30 days of the date at the top of the letter, the creditor may start court proceedings, subject to any other duties it has to the debtor (protocol, paragraph 3.4).
Does the protocol cover all the invoices my lender collects?
No. Most invoice finance is for invoices to other companies, and the protocol says it does not apply to business-to-business debts unless the debtor is a sole trader. Those claims follow the court's Practice Direction on Pre-Action Conduct instead.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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