Prevent Bad Debt
Prevent Bad Debt
Bad debt and late payment have always been a feature of the business arena, but with good management and practical steps bad debt can be prevented. Too many businesses have found out the hard way that taking steps to prevent bad debt after the event is too late.
Some may argue, though, that the only way to prevent bad debt is to limit yourself to doing business with companies that have an impeccable credit record, but it is never that simple! For one, your potential pool of customers would be pretty small. Secondly, if you are a small growing business, you may have little or no choice in doing business with a company that wants to do business with you. It can be difficult to turn down work, even if it is from a client that isn't paying on time. So what can be done?
The Number One Rule in Preventing Bad Debt
- Research your potential client. Before you decide to extend credit, always, always always credit check the company. You must obtain a credit report on the company to identify whether they are credit worthy. This is easier to do with a limited company, as the credit report will contain detailed information based on what has been filed into Companies House. Sole traders are more difficult to assess, as they do not have to legally supply anything to any public bodies.
- Analyse the credit report to spot any early warning signs of a bad credit history. What is the score and suggested credit limit? Do they have unsatisfied county court judgements against them? Have their annual accounts been filed on time?
- Use the suggested credit limit as a guide for the amount of credit you are willing to extend to the potential customer.
- Monitor the company over the period of your terms with them. checkSURE offers 'Keep it Live' reports that enable you to monitor the company for a year at no extra cost. You will be alerted to any updates and changes in the company. This way if anything negative begins to happen within the company, you will know earlier before it is too late.
Other Steps to Prevent Bad Debt
- Good credit management. Ensure that there are adequate systems in place for monitoring and chasing up bad debt. Set out the terms for payment clearly before the deal is done and not after. The terms and conditions for payment should be set out on the invoice, so the customers all know when and how to pay.
- Keep good accurate records of all your customers and records of all contact with your debtors.
- Be proactive rather than reactive in your approach to credit checking. Look out for signs and anticipate possible problems. These signs might include the debtor failing to pay by the agreed terms, diminishing contact between you and the company, increasingly implausible excuses and proposals to restructure the debt or change the payment terms.
- Act quickly when an account becomes overdue. Do not let it go along time before chasing the outstanding amount. And until a customer pays their bills, don't do anymore business with them.
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