Bad Debt – Avoidance and Recovery

Prevention is better than cure as the old saying goes, but often we don’t think of bad debt until it is too late. For a small business that may mean the difference between staying profitable or closing up shop. So here are a number of things that you can do to reduce the risk of bad debt.

  1. Check your customer’s credit worthiness. There are a number of services out there that help you check your customer’s history of paying their debts. For potential customers that carry a large risk, it is vital to check their credit worthiness. This could also include contacting other suppliers who have traded with this customer. A number of websites offer credit checking services, search for ‘business credit check’ in Google.
  2. Ask for part payment up front. This could work very effectively if you have large overhead cost associated to the work. Ask for part payment that would cover your costs. As your relationship with the customer grows, you could consider revising this.
  3. Follow your gut instinct. If something feels wrong about a deal or potential customer, it is cheaper to walk away than to bear the bad debt.
  4. Bad debt is not totally avoidable so plan for it. Set up credit control procedures so that when a customer doesn’t pay, you can follow a procedure that will help you get legal help if you need it
  5. Set up bad debt contingencies in your accounts. This will help you plan your cash flow and your profitability.
  6. Be clear in your communications. Be sure to agree to any contract in writing with terms of that agreement included. Be sure to communicate everything in detail, this will minimise any disputes over what has been agreed upon. If the parameters of your contract changes, put it in writing and get both parties to sign before you undertake the work.
  7. Talk to your customer who owes you money. Be friendly and understanding. You are more likely to get your money if you are considerate – you never know they may be victims of bad debt themselves and have every intention of paying you. Try to work out payment terms that your customer can manage. It is better to get your money late than not at all.
  8. Some customers had no intention of paying you and you may need to seek legal advice. If your customer owes you less than £5000 the small claims court can help. Your first step would be to contact the Citizens Advice Bureau (www.citizensadvice.org.uk) who will walk you through the process.

 

Sometime you have done everything and still find your business crippled by bad debt. This is not the end, but it may be a long journey to recovery. Here are some tips of what to do if you are a victim of bad debt:

  1. Loss of cash flow is usually the thing that will be your end, so start talking. Your employees, your bank, your suppliers are all people that could help you weather the storm by renegotiating terms with them.
  2. Look for instant cash release. Can you sell some of your assets to generate cash flow? Remember that an asset’s value drops dramatically if a company goes into liquidation and if you stand liable for the company’s debt, this may place you in personal financial difficulty.
  3. The government runs a business debt line (http://www.bdl.org.uk/) that can help you find the options available to you. Use all the help you can get.
Why not contact us to help create a bad debt avoidance and recovery solution

 

Comments are closed.