How Can You Mitigate Bad Debts?

Thursday, December 20, 2018, 6:00 AM | Leave Comment

When your customers fail to pay you what they owe, your company can be affected surprisingly quickly, hampering its ability to maintain a healthy cash flow and pay its own liabilities.

Having a robust collection process in place coupled with being proactive in chasing up late payers can be the difference between receiving the money you are owed or the debt turning bad.

Bad debts are those you have a very slim chance of recovering and are typically written off in your end of year accounts. Bad debts can be extremely costly to a company in financial terms, as well as the considerable amount of time spent chasing them before they are eventually given up on as a lost cause.

Once a debt turns bad it can extremely difficult to recover this money. The best thing is to do all you can to prevent this situation from occurring in the first place. By putting in the effort to devise a sound collection strategy at this stage, you are potentially saving yourself a huge amount of time and stress later down the line.

Here are some practical steps you can take to mitigate the threat of bad debts and increase the likelihood of your customers paying you what they owe on time:

  1. Be persistent in chasing up late payments

    The longer an invoice goes unpaid the less likely you are to receive payment. Late payment is a huge red flag that something is amiss with their finances; the longer you let the invoice go unpaid the greater the chance of the company’s problems exacerbating and entering formal insolvency.

    In this instance you would have a very slim chance of recovering any of the money owed to you. Therefore you should put a rigorous collection policy in place right from the start.

    Make your payment terms clear on any invoice you issue, and if payment has not been received by this date immediately begin the process of chasing it up.

    Start with an email prompt and follow up with telephone calls, letters, and further emails if necessary.

    If payment is still not forthcoming, do not be afraid to levy additional charges and interest on the amount owed.

    Depending on how valuable the customer is to your business, consider refusing to accept any more business from them until the matter is resolved.

    Remember, an unpaid invoice represents work you have done, or items you have provided, and you deserve to be paid for this.

  2. Make it easy for customers to pay

    Be as flexible as you can and offer customers various ways of paying their invoice. This could include cash, cheque, bank transfer, and even mobile payments depending on how your invoice process works.

    By doing this you are removing the excuse that the customer can’t get into your office to make payment, or that they cannot access their online banking while out on site.

  3. Do your due diligence

    By invoicing customers and allowing them to pay after you have provided your services, you are essentially providing a line of interest-free credit. Before you do this it is advisable to conduct checks against the customer to get a feel for their current financial situation and also their past credit performance.

    A bank wouldn’t loan you money without you being able to prove you can afford to pay it back; it shouldn’t be any different when you are considering advancing credit.

    There are certain programs available which will generate a company health rating, or alternatively if you know another company who has traded with them in the past then canvas their opinion and consider their experiences with the client before you proceed.

    If you have any doubt as to their credit worthiness insist on payment up front or, if this is not possible, it may be wise to refuse to conduct business with them altogether.

  4. Introduce a deposit or payment plan scheme for larger jobs

    By asking for a deposit or agreeing on a staged payment scheme you are giving yourself an element of protection should your customer fail to pay.

    Should they fall behind with the agreed payments, you can simply stop work or refuse to provide the rest of the order until the account has been brought up to date.

    While this does not guarantee the client will pay the money they owe you, you will at least reduce the loss which is being incurred giving you a better chance to absorb the bad debt and limiting the impact this loss has on your business.

  5. Consider invoice financing

    While invoice financing does not take away the threat of bad debt, it can be a huge help when it comes to managing your cash flow in the event of late payers. This is because invoice financing provides you with a level of certainty when it comes to receiving payment for outstanding invoices.

    You can typically release up to 80% of the value of the invoice which makes planning for the short-term much easier and allows you to continue working even if your clients fail to pay you on time.

    While this does come with a cost, it can be well worth it depending on your business and the current state of your cash flow.

    While invoice financing can undoubtedly be useful, this should not be used as an alternative to actively chasing payments owed to you.

    Your invoice financing company will be charging you interest on the amount advanced and this will only increase the longer invoices remain outstanding, therefore it is still important for the invoice to be settled as soon as possible.

Bad debt can ruin a business and while none of these steps will remove the risk of non-payment completely, having a sound collection strategy in place can significantly reduce the chance of you falling victim.

Written by Keith Tully, partner at Real Business Rescue (part of Begbies Traynor Group plc). Keith has more than 25 years’ experience advising company directors and shareholders on a range of business matters including cash flow concerns, creditor pressure, and raising finance.

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