The Malaysian SME Guide To Collecting Debt From Customers
Any business that wants to survive long-term must learn how to handle ‘unlucky’ customers who are constantly struck by tragedies that prevent them from paying their bill.
Let too many of them get away with it and there goes your bottom line.
Don’t let delinquent customers sink your hard work – here’s a systematic four-step process to collect outstanding payments or at the very least, minimise your losses.
Let’s begin.
Table of Contents
- ⏳ Debt recovery limitation periods
- Step 1: Evaluate debt recovery feasibility
- Step 2: Send a payment reminder
- Step 3: Issue a Letter of Demand (LOD)
- Step 4: Consider recovery enforcement options
- Get a tax write-off if recovery is unlikely
- Decide on late payment interest charges
- Let MISHU assist your customer debt recovery
⏳ Debt recovery limitation periods
- Under Malaysia’s Limitation Act 1953, creditors have six years to recover a debt.
- The six year limitation period starts from the date of when payment is due.
- If a customer acknowledges a debt / makes partial payment, the six-years resets.
- Enforcement of a Court Judgement against a debtor is six years by default.
- The courts may extend a judgement by another six years with justification.
- If your business allows the limitation period to run out, legal recovery is no longer possible.
- In short, businesses should not procrastinate if they want their money!
With six years to recover a defaulted invoice or collect outstanding payment, here are your next steps.
Step 1: Evaluate debt recovery feasibility
Check that customer has the means to pay the debt, and if they have a substantive defense for not paying.
To assess an individual’s financial standing:
- Use e-Insolvensi to check for bankruptcy
- For Sole Proprietors, verify their business status through MYDATA-SSM
- For significant debts, consider a deep dive to find hidden assets
A substantive defense means the debtor has a valid reason to refuse payment, such as having expressed dissatisfaction with your services.
Recovery is still possible, just more likely contested with a chance you won’t get the full amount.
Step 2: Send a payment reminder
Issue a polite but firm final payment reminder.
Though this message has no legal weight, it can still prompt consumers to settle their outstanding balance, especially for smaller amounts.
Feel free to use this template:
Final Payment Reminder Template
Dear [Recipient’s Name/Accounts Department],
I hope this message finds you well. We refer to our invoice [Invoice Number], dated [Invoice Date], for the amount of RM [Outstanding Amount], which remains unpaid despite our previous reminders. As of today, the payment is overdue by [Number of Days Overdue] days.
Please note that as per our agreed terms, late payments are subject to an interest charge of [X]% per month ([Y]% per annum), which has been applied to the overdue amount. The current outstanding balance, including accrued interest, is RM [Updated Outstanding Amount].
We kindly request that payment be made in full by [Specify Deadline, e.g., 7 days from the date of this email] to avoid further action. Payment can be made to the following account:
- Bank Name: [Your Bank Name]
- Account Name: [Your Business Name]
- Account Number: [Your Account Number]
Should we not receive the full payment by [Deadline], we will have no choice but to escalate this matter, including initiating legal proceedings to recover the amount owed, along with any additional costs incurred.
If you have already made the payment, please disregard this message. Otherwise, we urge you to treat this matter with urgency. Should you wish to discuss this further, please do not hesitate to contact us at [Your Contact Details].
Thank you for your prompt attention to this matter.
Yours sincerely,
[Your Name]
[Your Position]
[Your Business Name]
[Your Contact Information]
If the customer ignores this, send another reminder every day for the next six years in the hopes of breaking their spirit.
Otherwise, time to lawyer up!
Step 3: Issue a Letter of Demand (LOD)
A Letter of Demand is a legal letter sent by a debt collection attorney that outlines the amount owed and demands payment within a set period, usually 7–21 days.
An LOD from a lawyer is serious stuff and leads to one of two outcomes:
- The debtor asks to negotiate debt settlement without involving the courts
- The debtor refuses to pay / ignores the LOD and the lawyer files a suit
Option 1: Negotiate out-of-court settlement
Your lawyer negotiates with the debtor (or their lawyer) to reach mutually agreed payment terms, which can include partial debt recovery, installment plans, and interest on the principal.
If the dispute is truly one-sided, you could recover the full amount as a one-off payment.
Option 2: Obtain a Court Judgement
If out-of-court settlement is not possible and the debt is large enough to justify the risks of court litigation, consider initiating court litigation to obtain a Judgment against the customer.
They can be obtained through several methods:
- In Default of appearance: Debtor doesn’t respond or appear in court within given timeframe
- Summary judgment: The judge thinks it’s blatantly clear the debtor has no defence
- Full trial
With a Judgement, you can apply legal enforcement methods to recover the debt.
Step 4: Consider recovery enforcement options
You know those scenes in movies where the torturer opens up their bag of tools as the victim looks on in horror?
That’s you now – time to choose your tool for legally compelling the customer to pay:
- Judgment debtor summons: Debtor ordered to pay or face penalties.
- Garnishee proceedings: Recover funds from debtor’s bank or clients.
- Writ of seizure and sale: Sell debtor’s assets to recover funds.
- Bankruptcy (for debts above RM100,000): Forced asset liquidation.
Your lawyer will be able to advise you on the best course of action!
Get a tax write-off if recovery is unlikely
If recovery is not feasible, the best option is to get a tax write-off so you don’t owe tax on the unpaid debt, which LHDN would otherwise classify as taxable income.
Though smaller amounts can usually be written off without issue, larger amounts often require proof that your customer defaulted on payment and that your business took reasonable steps to recover the debt.
Decide on late payment interest charges
If your contracts or invoices have a clause on late payment charges, you can consider enforcing it provided two conditions are met:
- The terms were clearly communicated beforehand
- The interest rate is not excessive
For details on the legality of pursuing late payment charges, see our guide to overdue invoices.
Of course, just because you can impose these charges, doesn’t mean you should – we just want you to be fully informed beffore making a decision.
Let MISHU assist your customer debt recovery
MISHU is partnered with numerous professional business service providers to help deliver a comprehensive suite of solutions for SMEs in Malaysia. Let us connect you with the right experts to meet your needs!