Ina Reese Tax & Legal Practice – Flensburg | Harrislee

Debt management for small businesses

Law & Taxation Reese Flensburg
22.10.2026
General information
tie up liquidity, a formal debt collection procedure, Debt collection or a solicitor, Order for payment; enforcement order, Debt collection, Outstanding invoices, Collecting outstanding invoices, collect outstanding invoices, Instalment Payment Agreement, Binding invoices, Invoices tie up cash flow, Avoiding non-payment, B2B payment terms

Many cases of non-payment can be avoided before the invoice is even issued. We explain how small businesses can safeguard their receivables, set up a structured dunning process and enforce payment of outstanding invoices right through to enforcement proceedings, as well as the relevant tax implications.

Debt management for small businesses

Debt management for small businesses: from contract to enforcement

Small businesses rarely have their own accounts department to keep track of outstanding items. The owner issues invoices in the evening and checks incoming payments when he has time. If a payment is overdue, there is often a long wait because they do not want to upset the customer. For a business with just a few large orders, even a single unpaid invoice can tie up a whole month’s cash flow.

Debt management does not mean bombarding customers with reminders. It is a structured process that begins before the contract is concluded and ends with payment, through the courts if necessary. We explain the rules governing payment terms, how a dunning process works, when it is worth engaging a debt collection agency or a solicitor, what the process is from a payment order to enforcement, and the tax implications of bad debts.

Debt management begins before the invoice is issued

The most effective measures against non-payment take effect before the service is provided. It is almost impossible to implement them at a later stage.

Payment terms: What is permitted

In business dealings between companies, payment terms are freely negotiable, but not without limits. A payment term exceeding 60 days from receipt of the goods or services or receipt of the invoice is only valid if it has been expressly agreed and is not grossly unfair to the creditor (Section 271a(1) of the German Civil Code (BGB)). If payment is due only after an inspection or acceptance, a corresponding limit of 30 days applies to the inspection or acceptance period (Section 271a(3) of the German Civil Code (BGB)). For public contracting authorities, the limits are stricter: terms exceeding 30 days require objective justification, whilst those exceeding 60 days are invalid.

This is important for small suppliers when dealing with large customers who seek to impose long payment terms. If the payment term is specified in the customer’s terms and conditions of purchase, an even stricter limit applies: in cases of doubt, a period exceeding 30 days after receipt of the goods or services or receipt of the invoice is deemed unreasonably long and is therefore invalid (Section 308(1a) of the German Civil Code (BGB)). This also applies to transactions between businesses. An invalid agreement on the payment term does not invalidate the rest of the contract; in such cases, the statutory rules apply. Section 271a of the German Civil Code (BGB) does not apply to contracts with consumers or to instalment payments.

Discounts and payment in advance

Those who make advance payments over a period of weeks or months bear the greatest risk. In the case of contracts for work and services, the contractor may demand instalment payments equivalent to the value of the services rendered (Section 632a of the German Civil Code (BGB)). For new customers, bespoke orders and larger contracts, an advance payment upon placing the order or a payment schedule based on construction phases is common practice and enforceable, provided it is specified in the contract.

If, after the contract has been concluded, it becomes apparent that the customer is unlikely to be able to pay, no one is obliged to continue to supply goods or services in full knowledge of the facts. The party obliged to perform in advance may withhold performance until the customer pays or provides security (Section 321 of the German Civil Code (BGB)). They may set a reasonable deadline for this and, once this has expired, withdraw from the contract.

Retention of title

Anyone supplying goods should retain title to them until full payment has been made (Section 449 of the German Civil Code (BGB)). However, a simple retention of title is only effective as long as the goods remain in the customer’s possession in their original state. If the customer resells them or processes them, the retention of title is generally lost. Protection against this is provided by an extended retention of title, under which the customer assigns their claim arising from the resale in advance, and a processing clause. Both must be expressly agreed; in practice, this is usually set out in the general terms and conditions.

Important for enforcement: The seller may only demand the return of the goods once they have withdrawn from the contract (Section 449(2) of the German Civil Code (BGB)).

Terms and Conditions that actually apply

Terms of payment, retention of title and rules on default are usually set out in the general terms and conditions. They are only valid if they are effectively incorporated into the contract. Printing them on the back of the invoice is too late, as the contract has already been concluded by then. If both parties refer to their own General Terms and Conditions, conflicting clauses are generally not valid. According to case law, a simple retention of title is usually valid nonetheless. An extended retention of title, on the other hand, often fails due to a defence clause in the customer’s terms and conditions of purchase. Anyone working with major customers should therefore be aware of which terms actually apply in the event of a dispute.

Getting to know your customers: Checking creditworthiness

In the case of new customers and larger orders, it is worth taking a quick look at their solvency. The Commercial Register and insolvency notices are publicly accessible. Anyone who can demonstrate that they wish to avert financial losses caused by insolvent contractual partners may access the debtors’ register maintained by the enforcement courts (Section 882f(1)(4) of the Code of Civil Procedure). In addition, there are fee-based reports available from credit reference agencies.

If the customer is a natural person, such as a sole trader or a private individual, a credit check constitutes the processing of personal data. It is permitted if there is a legitimate interest (Article 6(1)(f) of the GDPR). This is generally the case where the business provides goods or services in advance and bears a genuine risk of non-payment. The customer must be informed of this (Articles 13 and 14 of the GDPR), for example in the privacy policy or in the quotation.

The invoice as a basis

A claim can only be enforced as effectively as it is documented. The invoice should describe the service in detail, refer to the order, delivery note or acceptance certificate, and specify a clear due date.

The invoice is decisive in determining whether payment is in arrears. In commercial transactions, the customer is deemed to be in arrears no later than 30 days after the due date and receipt of the invoice, even without a reminder (Section 286(3) of the German Civil Code (BGB)). In the case of consumers, this only applies if the invoice expressly states this consequence. A sentence such as „If you do not pay within 30 days of the due date and receipt of this invoice, you will be in default“ should therefore appear on every invoice issued to private customers.

According to case law, a payment date that the trader unilaterally enters on the invoice does not, in itself, trigger default without a reminder. For this to happen, the deadline must be agreed in the contract. Anyone wishing to claim interest on late payments before 30 days have elapsed must issue a single, explicit reminder once the payment deadline has passed.

From 2027, many businesses will also be required to use e‑invoicing. Read more about this in our article on E‑invoicing from 2027.

A robust debt collection system

In legal terms, a single reminder is sufficient to place the debtor in default (Section 286(1) of the German Civil Code (BGB)). The widespread belief that three reminders are required before a payment order can be issued is incorrect. A structured reminder system is therefore not about fulfilling formalities, but about reliability: every outstanding invoice is treated in the same way at the same time, regardless of how busy the business is at the moment.

A tried-and-tested process for small businesses:

On the due date: Check for incoming payments. Outstanding items are added to a follow-up list.
About a week after the due date: A friendly reminder to pay – we’re also happy to contact you by telephone. Often, the invoice has simply been misplaced or sent to the wrong address.
Two weeks later: A reminder stating a specific payment deadline and noting that interest will be charged on late payments.
Once the deadline has passed: A final demand for payment, warning of legal action, followed by referral to a solicitor’s practice or an application for a court order for payment.

It is important that one person within the organisation is responsible for following up on matters and that the steps announced are actually carried out. If a threatened consequence is not followed through, it only prolongs the waiting time.

Once a debt falls into arrears, a claim for interest on arrears arises: five percentage points above the base rate for consumers, and nine percentage points above the base rate for other debtors. If the debtor is not a consumer, a flat-rate charge of 40 euros per claim is added (Section 288 of the German Civil Code (BGB)). We explain the value of these claims and why a reminder does not interrupt the limitation period in our article Limitation period at the end of the year.

Suspension of deliveries in existing business relationships

If a regular customer fails to pay, the question arises as to whether further orders should still be fulfilled. In the case of partial deliveries under the same contract, the trader may withhold further deliveries as long as earlier invoices due remain unpaid (Section 320 of the German Civil Code (BGB)). If the trader is obliged to perform first, the defence of uncertainty (Section 321 BGB) may, under certain circumstances, be of assistance. In the case of various orders arising from an ongoing business relationship, a right of retention under Section 273 of the German Civil Code (BGB) may apply; between traders, this may also apply under Section 369 of the German Commercial Code (HGB). Framework agreements with fixed delivery obligations may restrict this. A suspension of deliveries should therefore be assessed in advance and notified to the customer in writing.

Debt collection agency or solicitor?

If payment is still not made despite a reminder, small businesses are often faced with the choice between a debt collection agency and a law firm. Both are authorised to recover debts out of court. The differences lie in the costs and in what happens if the debtor contests the claim.

Costs: Recoverable debt collection costs are limited to the lawyer’s fees. The creditor may claim from the debtor no more than the amount a lawyer would be entitled to charge for the same work (Section 13e of the German Regulation of Lawyers’ Fees Act (RDG)). Since October 2021, lower fee rates have also applied to undisputed claims: as a rule, the fee is capped at 0.9; in straightforward cases, it is capped at 0.5. A case is generally considered straightforward if the debtor pays within two weeks of the first demand for payment (No. 2300 VV RVG). Anyone who first instructs a debt collection agency and then a solicitor will, as a general rule, not be reimbursed for the double costs (Section 13f RDG). If the debtor fails to pay at all, the creditor bears the cost risk, unless they have agreed on a success-based fee.

Legal representation in court: Debt collection agencies are authorised to initiate the court dunning procedure and to enforce judgement against movable assets. However, if the debtor lodges an objection and the matter is referred to the court of first instance, their power of representation ceases (Section 79(2)(4) of the Code of Civil Procedure). In such cases, only a solicitor may act as legal representative, and that solicitor must familiarise themselves with the case from the outset. In principle, the creditor may also conduct the proceedings themselves before the local court.

For claims where objections from the customer are to be expected – for example, due to alleged defects – contacting the solicitors’ practice directly is therefore usually the quickest route. Furthermore, a formal demand for payment from a solicitor, setting a deadline, is often more effective than any further reminders sent by the claimant themselves.

From the order for payment to enforcement

If the debtor fails to pay even after the final reminder, the matter must be taken to court. If the claim is undisputed, the court-based debt collection procedure is quicker and cheaper than bringing a claim. For applicants from Schleswig-Holstein, the Schleswig Local Court is the central court responsible for debt collection proceedings.

The procedure for the order for payment

Order for payment: The court does not examine whether the claim is valid, but only whether the application is complete in formal terms. The order for payment is served on the debtor. The debtor has two weeks to pay or to lodge an objection (Section 692(1)(3) of the Code of Civil Procedure).
Enforcement order: If the debtor does not lodge an objection, the creditor applies for a writ of execution (Section 699 of the Code of Civil Procedure). They have six months from the date of service of the order for payment to do so. If they miss this deadline, the order for payment ceases to have effect (Section 701 of the German Code of Civil Procedure (ZPO)).
Title: The enforcement order is equivalent to a default judgement that is provisionally enforceable (Section 700 of the Code of Civil Procedure). The debtor may lodge an objection within two weeks. If no objection is lodged, it becomes final, and the claim covered by the enforcement order is subject to a limitation period of 30 years. However, interest accruing from the enforcement order is subject to a limitation period of three years.

If the debtor lodges an objection, the proceedings are converted into standard legal proceedings at the creditor’s request. To do so, the creditor must pay the additional court fees and substantiate their claim. Following an objection to the enforcement order, the court refers the matter ex officio. Since 1 January 2026, local courts have had jurisdiction over claims up to 10,000 euros. If the customer has already disputed the claim, bringing a legal action is often the better course of action from the outset, as an objection is to be expected in any case.

Enforcement proceedings

A court order alone does not generate any money. If the debtor still fails to pay, various enforcement measures are available. Which one is appropriate depends on what is known about the debtor’s assets.

Financial disclosure: The debtor must, upon request, disclose all their assets to the bailiff, including bank accounts, claims and their employer (Section 802c of the Code of Civil Procedure). If the debtor fails to provide this information, if, according to the information provided, full satisfaction is not to be expected, or if the debtor fails to pay within one month, they will be entered in the register of debtors (Section 882c of the Code of Civil Procedure). For businesspeople, this is often the decisive incentive to pay.
Information about third parties: If the debtor fails to provide details of their assets, if the assets declared are insufficient, or if they cannot be contacted at their registered address, the bailiff may make enquiries with the employer regarding pension insurance, bank account details via the Federal Central Tax Office and vehicle registration details from the Federal Motor Transport Authority (Section 802l of the Code of Civil Procedure).
Account attachment: Under a garnishment and transfer order issued by the enforcement court, the funds in the debtor’s account are seized. In the case of natural persons, a basic monthly amount remains protected in a garnishment-exempt account.
Preliminary attachment: If the debtor’s bank details or a customer of theirs are known, the creditor can act swiftly by making a provisional attachment even before the court issues the attachment order (Section 845 of the Code of Civil Procedure). It has the same effect as a seizure if the attachment takes place within one month.
Seizure of property: The bailiff seizes movable property. In the case of small claims and private individuals, this is often of little use; however, it can be effective for businesses with vehicles or stock.

How to agree on an instalment plan correctly

If a customer offers to pay in instalments, this is often the quickest solution, provided the agreement is clearly worded. It should state in writing that the debtor acknowledges the total claim, including interest and costs. This acknowledgement resets the limitation period (Section 212 of the German Civil Code (BGB)). If it is formulated as an express acknowledgement of debt, it also generally precludes the debtor from raising any objections to the claim of which they are aware. This includes fixed instalments with specific dates and a fall-back clause: if the debtor falls behind with an instalment, the entire outstanding amount becomes due immediately. If enforcement proceedings are already underway, the bailiff may also allow the debtor to pay by instalments, provided the creditor has not ruled this out (Section 802b of the Code of Civil Procedure (ZPO)). Enforcement is then suspended. The creditor may object to the payment plan without delay. If the debtor falls more than two weeks behind with an instalment, the plan becomes void.

One point is often overlooked: if the debtor subsequently becomes insolvent, the insolvency administrator may, under certain circumstances, reclaim any payments received. In the case of payments to which the creditor was entitled, it depends on whether the creditor was aware of the debtor’s insolvency (section 133(1) and (3) of the Insolvency Code (InsO)). If the creditor has agreed to payment by instalments, it has been presumed since 2017 that they were not aware of the debtor’s insolvency (section 133(3), second sentence, of the Insolvency Code). However, this presumption may be rebutted by other circumstances, for example if the debtor openly declares that they are no longer able to meet their creditors’ claims in full. Such wording should not be included in an instalment payment agreement.

Tax considerations

Debt management is not just a matter of liquidity. Outstanding and written-off debts have an impact on VAT, the balance sheet and profit.

Value Added Tax: Checking the actual tax liability

Anyone who accounts for VAT on their turnover based on agreed fees is liable for VAT as early as the advance return period in which the service was provided (Section 13(1)(1)(a) of the German VAT Act), regardless of whether and when the customer pays. For small businesses, this means having to pre-finance the tax out of their own pockets. Businesses with a total turnover of no more than 800,000 euros in the previous year and self-employed individuals may apply to the tax office for taxation on an actual basis (Section 20 of the German Value Added Tax Act). In this case, VAT is only payable upon receipt of payment.

If a claim becomes uncollectible under the ‘debit taxation’ scheme, the VAT must be adjusted for the period in which the claim becomes uncollectible (Section 17(2)(1) of the VAT Act). A receivable is deemed irrecoverable not only upon definitive loss, but also as soon as it cannot be enforced for the foreseeable future. For further details, see our article on Limitation period at the end of the year.

Interest on late payments constitutes compensation for loss and is not subject to VAT. No VAT is therefore charged on the interest. It is calculated on the basis of the full invoice amount.

Balance sheet and income statement

Companies preparing financial statements must write down doubtful debts as at the balance sheet date. For individual at-risk debts, this is done by means of a specific provision; for the general risk of default on the remaining debt portfolio, a general provision is applied. In each case, the net amount excluding VAT is written down. For tax purposes, a write-down to the lower recoverable amount is only permitted in the case of an impairment that is expected to be permanent (Section 6(1)(2) of the Income Tax Act). The tax authorities expect verifiable reasons for this, such as historical data from previous defaults or the status of dunning and enforcement proceedings. A documented dunning process therefore also assists with the preparation of the annual accounts.

Under the cash-basis accounting method, a non-payment does not affect the profit because the outstanding payment was never recorded as income. Court and legal fees incurred in enforcing trade receivables are operating expenses in both cases. If the debtor reimburses them at a later date, they constitute business income.

Factoring as an alternative

In factoring, the company sells its receivables to a factor and receives the majority of the amount immediately. In true factoring, the factor assumes the credit risk, and the receivables are removed from the company’s balance sheet. In non-true factoring, the credit risk remains with the company; in economic terms, it amounts to a loan.

Factoring improves cash flow, but incurs fees and interest. For the purposes of trade tax, one quarter of the interest or discount component of the factoring costs is added to the taxable amount (Section 8(1)(a) of the Trade Tax Act). However, this only applies if the total of all financing components exceeds 200,000 euros. This also includes interest on loans and pro rata rents, tenancies, lease payments and licence fees. For small businesses, therefore, this addition is rarely a factor. Whether factoring is worthwhile depends on the volume of receivables, the customer structure and the terms and conditions.

Checklist: Receivables management in seven steps

Set payment terms. Payment terms, instalments or advance payments, and retention of title must be included in the quotation, the contract or the general terms and conditions that have been effectively incorporated.
Check new customers. For larger orders, consult the commercial register, insolvency notices and, where appropriate, a credit reference agency.
Issue invoices in full and promptly. Including the specification of services, reference documents, the due date and, for private customers, a notice that payment will be deemed overdue after 30 days.
Set up a follow-up reminder. Check outstanding items weekly; one person is responsible for this.
Adhere to the payment reminder stages. Reminder, warning with a deadline, final notice. Take the steps previously announced.
Hand it in on time. At the very latest, once the final deadline has passed, instruct a solicitor or apply for a court order for payment. Keep an eye on the impending expiry of the limitation period at the end of the year.
Sort out the tax aspects. Check that taxation is in line with actual figures, and ensure that bad debts are taken into account in the correct period for VAT and in the annual accounts.

Legal and tax services under one roof

When it comes to outstanding receivables, legal and tax issues are intertwined. Civil law determines whether a claim is enforceable. Tax law determines when VAT can be adjusted and the receivable written off. In many businesses, these two matters are handled by different advisers.

Ina Reese is a solicitor, a specialist in tax law and a tax adviser. In our Credit management We handle the entire enforcement process, from the lawyer’s demand for payment through the dunning procedure right through to enforcement proceedings. We draft payment terms, general terms and conditions and retention of title clauses in the Commercial and Company Law and in the general civil law. We explain the tax treatment of bad debts, taxation on an actual basis and value adjustments in our Tax advice.

Frequently asked questions about receivables management

How many reminders do I have to send before a payment order is issued?

There is no specific number. A single reminder is sufficient to put the debtor in default. In commercial transactions, default occurs no later than 30 days after the due date and receipt of the invoice, even without a reminder. An application for a payment order can also be made without a prior reminder. However, if the debtor was not yet in default at that point, there may be a dispute over who bears the costs. It is therefore advisable to send a reminder in advance.

At what amount is it worth applying for a payment order?

There is no minimum claim amount. The court fee is at least 38 euros and is based on the amount of the claim. If the claim is valid, the debtor must bear the costs of the proceedings. The key question is rather whether there are any assets available from the debtor. In the case of debtors with no assets, the creditor is left to bear the costs, but holds a judgement which they can enforce for 30 years, for example if the debtor’s financial circumstances improve at a later date.

Who pays the legal fees?

If the debtor is already in default, they must reimburse the costs of legal proceedings as damages for default. This applies to a formal demand for payment issued by a solicitor as well as to court proceedings. The flat-rate late payment charge of 40 euros is set off against this. If the debtor does not pay because they have no means to do so, the creditor initially bears the costs themselves. For business claims, these are treated as business expenses.

Am I allowed to stop further deliveries if a customer fails to pay?

Often, yes. In the case of partial deliveries under the same contract, the contractor may withhold further deliveries as long as previous invoices due remain unpaid. A right of retention may apply in the case of various orders arising from an ongoing business relationship. Framework agreements may restrict this. Any suspension of deliveries should be assessed in advance and notified in writing.

In summary

Payment terms exceeding 60 days are only effective to a limited extent in B2B business; in general terms and conditions of purchase, terms exceeding 30 days are generally deemed invalid. Discounts, advance payments and retention of title safeguard the supplier’s advance payment.
In commercial transactions, payment is deemed to be in arrears no later than 30 days after the due date and receipt of the invoice. For consumers, a notice to this effect must be included on the invoice.
One reminder is enough. A well-structured reminder process with clear deadlines and responsibilities is more important than the number of reminder stages.
Debt collection costs are limited to the lawyer’s fees. Once the debtor lodges an objection, the debt collection agency’s authority to act on their behalf ceases.
An enforcement order is an instrument that remains enforceable for 30 years. Asset disclosure and the attachment of bank accounts are the main means of enforcement.
Instalment payments should include an acknowledgement of the debt and a forfeiture clause.
From a tax perspective, it is worth taking a look at the actual taxation, the VAT adjustment and the value adjustment in the annual accounts.

Do you have any outstanding debts, or would you like to have your payment terms reviewed? During an initial consultation lasting around 15 minutes, we’ll assess where you’re at and what steps would be best to take. Get in touch now