A letter of demand from a supplier or creditor: how to respond well

Of all the letters in this section, a creditor’s letter of demand has the least legal force and the most room to manoeuvre. It’s still a letter that deserves a reply. Letters of demand are how disputes become court claims, and how overdue supplier accounts become statutory demands. Handled well, this is the point where most of them simply stop.

What is a letter of demand, legally speaking?

It’s a written request for payment that sets a date and says what the creditor will do if the date passes. It might come from the supplier directly, from its lawyers, or from a collection agency. It’s not issued by a court and doesn’t carry any automatic consequences.

What it does is create a record. If the matter ends up in court, the creditor will show that it asked for payment and gave you time. And if you’re a company, the creditor’s next step may well be a statutory demand, which comes with a 21-day clock and much sharper teeth.

What should my reply say?

Your reply should be written, polite and specific. It should do one of four things:

Your position	What to put in writing
You owe it and can pay	Confirm the amount and the date payment will be made
You owe it but can’t pay yet	Propose instalments or a lump sum on a specific date, and stick to it
You owe part of it	Pay the undisputed part and explain the rest in detail
You dispute all of it	Explain why, attach evidence, and invite discussion

Avoid vague promises like “we’ll sort it out soon”. A creditor can’t take that to a meeting with its own finance team. “We’ll pay $8,000 on the 15th and the balance of $12,000 on the 30th” is something it can say yes to.

business.gov.au suggests talking to creditors early, explaining your circumstances and asking about hardship arrangements or adjusted terms. That’s sound advice for suppliers as much as for lenders.

Should I pay, negotiate or fund it?

It depends on who the creditor is and what they mean to the business.

• A supplier you can’t trade without. Paying in full, even with outside funding, protects the relationship and your supply. A short-term loan is often cheaper than switching suppliers under stress.
• A creditor you won’t deal with again. A negotiated settlement — a discount for a prompt lump sum — may be available. See funding a creditor settlement.
• One of several creditors chasing you. Look at the whole ledger first. The which-debt-first sorter ranks ATO, wage, supplier and lender pressures in order of urgency.

If paying the debt in full makes sense and the business can carry a loan, a quick enquiry is enough for us to tell you what’s possible. Nobody checks your credit at that point.

What happens if I ignore it?

For a sole trader or partnership, the usual next step is a claim in the local or magistrates court. If the creditor wins judgment and isn’t paid, it can seek enforcement, and for larger debts a bankruptcy notice.

For a company, the creditor can skip the court claim and serve a statutory demand for a debt of at least $4,000 that’s due and payable. If the company doesn’t respond within 21 days, it’s presumed insolvent, and a winding-up application can follow.

So an unanswered letter of demand can be the first step on a path that ends with a liquidator. That’s worth a phone call and a letter.

An illustrative example

Illustrative only. A Gold Coast building supplies business sends a letter of demand to a small builder for three overdue invoices, giving 14 days. The builder is owed money by two clients but can’t wait for them. He replies within a week proposing payment in full on day 21, then arranges a short-term unsecured loan against the business’s turnover. The supplier is paid, keeps the builder’s account open, and the loan is cleared as the client payments land.

Which funding options suit a single creditor demand?

• Unsecured or cash-flow funding of about $5,000 to $500,000, with the limit worked out from turnover and bank statements, for trading businesses. Read about unsecured rescue funding.
• Property-secured funding of $20,000 up to $5,000,000 where the amount is larger or other debts need clearing too.
• A consolidation loan where several overdue suppliers, the ATO or a lender are all waiting — covered on our business debt consolidation page.

If a collection agency has taken over, read dealing with a debt collector on a business debt.

What should I avoid saying or doing?

• Don’t ignore it and hope. Silence reads as either inability or unwillingness, and both push the creditor towards legal action.
• Don’t promise what you can’t deliver. A broken promise does more damage than an honest “we need until the 30th”.
• Don’t admit to debts you dispute. If part of the claim is wrong, say so clearly in writing.
• Don’t pay by instalments without written terms. Record what’s agreed, including whether interest or fees stop.

Would paying it out be the calmer option?

A letter of demand is a creditor giving you one more chance to sort things out between yourselves. If the debt is real and the business is sound, funding a payment is often quicker and cheaper than any dispute — and it stops the next letter being a statutory demand.

The enquiry takes about 60 seconds, and first enquiries never involve a credit check. We won’t broadcast your details to a string of lenders; one real person looks at your situation and calls. Please give us accurate numbers for the debt, your turnover and anything you own, so the first conversation is a useful one.

See if you can pay the demand on your terms →