7 Steps for minimising bad business debt

7 Steps for minimising bad business debt

Most businesses have experience with customers who don’t pay their debts or pay them months later, but have managed to cover their losses and move on. Whatever the reasons for bad debts, SMEs are in a far more precarious position than the big multi-nationals, who have more resources than smaller businesses.

Whilst it’s next to impossible for SMEs to navigate a path that completely avoids bad business debt, there are strategies that can help you to reduce the frequency of their occurrence.   

1. Upfront payments

The best way to remove the risk of bad debt is to only accept upfront payments for your services or products. This strategy doesn’t work for everyone, because many businesses simply don’t have the cashflow to pay upfront; they need to wait for their own customers to pay them, before they can pay you. Nevertheless, if it’s at all possible, upfront payments will significantly reduce your risk of bad debts.

2. Check credit worthiness

It’s vital to check the financial credibility of any company that you are considering as a customer and who won’t be paying upfront. This credit rating will help you decide whether or not they pose a financial risk to your business. You can obtain these credit ratings from companies such as Equifax, Australia’s largest reseller of ASC company information.

3. Set low credit limits

If you are unsure of a business’s ability to pay their invoices you might consider setting a limit to their credit with your company. It’s actually a good idea to do this across the board, until a customer has proven that they pay on time.

4. Promote your T&Cs

Make sure that your Terms & Conditions include interest rates for late payments and how non-payments will be dealt with by your company. Send these T&Cs to every new customer and ask them to confirm that they have read them. Your customers then have no excuse to profess ignorance about how you manage their bad debts, and it might prompt them to pay on time as well.

5. Check contact details

Make sure that you know the correct contact details of the person who deals with invoice payments and anyone else who also needs to receive a copy of the invoice. The last thing you want is for your invoice to be stuck sitting in someone’s email box, because they went on a 6-month holiday.

6. Send your invoices promptly

Don’t be late issuing your invoices and always ask for payments when the due date arrives. A casual approach to invoice payments by your company will simply encourage bad debts in your customers. Also find out if they have a regular payment schedule and follow up as soon as this date arrives, if the payment hasn’t been made into your account.

7. Contact them yourself

If customers don’t pay their invoices, follow up your written requests for payment with a phone call. You never know what might have happened and sometimes, a simple phone call can clear the air and make everything right again.

Unfortunately, some bad debts never get paid, but as long as you have a strategy in place, you will minimise these problems. You can also take out insurance against bad debts, which for SMEs, is an important policy to have. 

To decide what type of insurance policies are suitable for your business talk to an insurance specialist today.

General Advice Warning
The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.

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