Why cash flow problems become legal problems

For many SMEs, cash flow can be one of the greatest challenges to growth and sustainability. Rising operating costs, delayed payments and economic uncertainty place significant pressure on businesses of all sizes.

While many SMEs view cash flow problems as purely financial issues, they often develop into legal problems.

Some of the most common statements heard from small business owners when discussing unpaid accounts are:

• "The client still says that they will pay."
• "The debtor has promised to pay at the end of the month."
• "We do not want to damage the relationship."
• "We will deal with it later."

Then what happens next? Months pass. The relationship deteriorates. The debt remains unpaid.

By the time legal advice is sought, the business may have lost more than just cash flow. In some cases, delaying action can have serious legal consequences.

When late payment becomes a legal problem

Many businesses have experienced late payment at some point. A customer may fail to pay an invoice, ask for more time, or promise payment once their own customers have paid them.

At some point, however, being understanding can create legal risk. Those risks may include:

• important documents being lost, including contracts, invoices and related records
• staff members leaving the business after dealing with a specific client portfolio
• witnesses becoming unavailable
• payment arrangements not being properly recorded
• disputes about services rendered
• the claim prescribing

The longer an unpaid account remains unresolved, the greater the risk becomes.

The cost of delaying action

Many SMEs hesitate to pursue outstanding accounts, especially when they are only a month late, because they wish to preserve the commercial relationship.

While maintaining relationships is important, especially as a small business, allowing debts to remain unpaid for extended periods can place significant pressure on the business's own cash flow.

Delayed payments can affect:

• salaries and wages
• supplier relationships
• tax obligations
• operational expenses
• business growth opportunities

Suddenly, one unpaid invoice can start affecting several other areas of the business.

It is no longer just about the immediate financial obligation. The cost of enforcement can also become part of the cash flow problem, including the cost of legal fees, letters of demand and court proceedings.

The three-year prescription rule

One of the most significant legal risks businesses face with unpaid debts is prescription.

Many people have heard of prescription in general terms, but in many contractual matters a debt may prescribe if the creditor fails to take the necessary steps to enforce the claim.

Once a debt has prescribed, the creditor may lose the ability to enforce the claim through the courts.

Many businesses are unaware that simply waiting for payment does not stop prescription from running. A client's promises to pay, ongoing discussions or a long-standing commercial relationship may not be enough to protect the creditor's rights.

It is important not to assume that knowing a client personally, or having a good relationship with them, will protect the business once an invoice becomes unpaid.

A promise to make payment is just that: a promise.

Unless the arrangement is properly recorded, disputes may later arise regarding:

• the amount owed
• the payment terms
• whether the debtor admitted liability at all

It is generally safer to formalise any payment arrangement in writing.

What case law tells us

The judgment in Ellis Structural and Civil Engineers CC v Egan Property Group (Pty) Ltd serves as an important reminder of the risks associated with delayed debt recovery.

The dispute concerned professional fees allegedly owed for services rendered. The court considered whether certain claims had prescribed because legal proceedings had not been instituted within the prescribed period.

The judgment illustrates that businesses cannot always delay enforcement of their claims indefinitely. Courts will generally consider when the debt became due rather than when the creditor eventually decided to pursue payment.

For businesses, the message is clear: unpaid accounts should not simply be left unresolved for extended periods.

Invoicing is not a pause button on prescription

Businesses frequently agree to informal payment arrangements through:

• WhatsApp messages
• telephone discussions
• verbal promises
• informal email exchanges

While these methods may preserve business relationships, informal communications often create uncertainty.

When making a payment arrangement, businesses should consider recording:

• the amount outstanding
• the payment date
• the instalment amount
• any acknowledgment of liability
• the consequences of non-payment

Having a properly documented arrangement can provide greater certainty and may assist if legal proceedings become necessary.

Acknowledgments of debt

An acknowledgment of debt can be a valuable tool when dealing with outstanding accounts.

These agreements can:

• record the specific amount owed
• establish payment terms
• reduce disputes
• provide evidence of liability
• potentially interrupt prescription in certain circumstances

Practical steps businesses can take

Businesses can reduce legal risk by doing the following:

• invoice promptly, so services rendered are billed without delay
• follow up on outstanding accounts early
• keep written records of conversations, payment arrangements and acknowledgments
• obtain acknowledgments of debt where appropriate
• seek legal advice early rather than waiting until the last minute

Conclusion

Cash flow problems are often viewed as accounting issues. In reality, they frequently become legal issues.

Businesses that act early, maintain proper records and address unpaid accounts proactively are generally in a stronger position than those that delay action.

In difficult economic conditions, protecting cash flow is not only good financial management. It is also an important aspect of legal risk management.

If your business has outstanding accounts that have remained unpaid for an extended period, obtaining legal advice early may preserve options that become more limited over time.

This article is intended for general informational purposes only and does not constitute legal advice. Specific legal advice should be obtained in relation to the particular circumstances of each matter.