How To Avoid Bad Debts

Cash flow is essential for business survival and in today’s tough economic climate, ensuring your business is free from bad debts can be the difference between sink or swim. According to research the source of approximately 80 percent of bad business debt comes from accounts with a trading relationship in excess of 12 months. The same research suggests that for every 1,000 customers, a business can typically expect 200 to report significant financial changes annually that could potentially impact their business credit. 

While credit checks can be effective in the process of ascertaining the likelihood of new customers paying in full and on time, they cannot predict the future financial performance or stability. All businesses experience financial ups and downs so ensuring you have a robust and organised credit control system in place can help minimise the risk of encountering bad business debts.
 

Trade references

In addition to an initial credit check, asking for trade references can add peace of mind in the decision process to take on new customer credit accounts. Determine if they have had a long and successful history with existing and former businesses. Did they pay on time and in full?
 

Terms and conditions

Set clear terms and conditions in conjunction with any credit agreements. This can not only give you peace of mind but will also go some way in offering you protection if things don’t go according to plan and you have to take legal action to recover debts. Ensure that any terms and conditions are signed by the person responsible for the payment of accounts such as a financial director, business owner or manager with authority.

The document should clearly set out time frames in which payment should be received after receipt of goods or services such as 30 days and to whom it is payable. Detail the consequences of any late payments such as interest charges or late payment fees and the credit limit you have agreed.

Many businesses now opt to include a retention clause whereby the supplier retains ownership of the goods until they are paid for, although this cannot be as effective where an upfront service is provided.
 

Set credit limits

When setting a credit limit never offer more than you can risk or an amount higher than you feel the company can reasonably pay for. Rather than extending the credit limit when a customer wants to order more, ask them to pay the additional balance in advance.
 

Timely and correct accounting

Staying organised and implementing a credit control and accounting process can help your business issue invoices and chase late payments as and when they arise. Keep a log of any communication with your customers and alternative points of contact should the person responsible for paying invoices be out of the office or on holiday. 
Keep accurate details on file of the person responsible for paying the bills and check from time to time that this information is up to date. 
 

Invoicing

Most accounts won’t get paid if invoices are not sent so make sure that they are sent on time and have clear details on how to pay and to whom. The invoice should also have a reminder of the payment terms and due date.
 

Resolve issues quickly

If you are in a situation where one of your customers has failed to pay their account on time, work to resolve the issue quickly and professionally. A quick phone call is usually the fastest and most effective route. It may be that the customer has simply forgotten or may need an extra few days. Either way, talking things through can help to maintain the business relationship and is normally more effective as an initial form of communication than an email or demanding letter.
 

Reconsider the terms

Be flexible and adaptable where you can to keep business relationships strong in certain circumstances. You may choose to reconsider your terms to adapt to the customers’ schedule if for instance, they pay other businesses on a 45-day cycle and you have only offered 30. Extending the time scale may lead to payment on time and save you valuable time in chasing unpaid invoices. Reconsider carefully so that it suits the needs and cash flow cycle of your own business first.
 

Credit check and validate

The purpose of a credit check is not simply to check the credit rating and risk, but also to check the most fundamental point - be sure exactly who you are giving credit to. You can start wth a simple free company search. Is the company a Limited company, in which case liability for any debts rests with the company as an entity, and not the directors? Or is the company a sole trader or partnership, in which case the owners are liable for any debts incurred? Or is the company part of a group structure, or using a trading name, in which case you need to be sure exactly who you are dealing with, and which entity is ultimately responsible for any debts owed to you. The chances of bad debts are greatly increased if you cannot enforce payment or county court judgments because you have incorrect or incomplete trading information on the business you were dealing with.

See more credit tips and information.