Business Library

Stop worrying about bad debt!!!

Many companies have experienced a bad debt. Some have managed to continue to trade while others have not been as fortunate. There are many reasons why companies may find themselves in this position, but the most common is over reliance on a few customers. However, it is very difficult to turn the work down, even if they aren't paying on time.

The introduction of the revised late payment legislation promised the end of being out of pocket if your customers paid late - sadly the practicalities of this have failed to live up to what was a fantastic idea on paper.

As a result, the question remains, how do you encourage early payment of your invoices and protect yourself if they aren't paid?

Keeping on top of the situation

The first practical step to decrease payment time and prevent bad debts is to have effective credit control procedures in place:

Confirm that your customer has received the invoice and has all the necessary paperwork they need to process payment (e.g. purchase order, delivery confirmation etc)
Contact them the day the invoice is due to be paid, ask what payment run it will be on.
Follow with weekly calls - the telephone is always more effective in monitoring and judging reasons given for late payment than a letter.
Monthly statements should be sent out summarizing what and when invoices are due to be paid.
If you believe there is a problem with a customer paying their debts get basic legal advice about formal notification letters. This should nip in the bud the need to progress things to a CCJ or winding up petition.

The above is only practical in larger, more established companies who can carry the head count needed to provide credit control effectively. Outsourcing this function to a factoring company is usually cheaper than employing designated staff. Factoring has the added benefit of offering you funding to smooth your cash flow.

If you have a top notch credit control procedure but your customers are just naturally slow payers (for example larger blue chip firms and the public sector) invoice discounting may be a useful funding option for you to help your cashflow.

Get quotes: factoring | invoice discounting

Maintaining a good customer base

How well do you know your customers? Many small business owners have a personal relationship with the people who run the firms that make up their customer base but don't know much about the financial strength of the firms they are dealing with. A positive personal relationship is unfortunately not going to mean much when your customer is struggling financially and needs to protect their own interests before yours. There are a few practical pointers to maintaining a healthy customer base:

Credit check your customers, are they worth a credit facility and how much credit should you feel comfortable giving?
Ensure all terms and conditions for payment are on your invoices - that way they know when and how to pay!
Try to have a range of customers on your books, that way if there is a problem with one your work does not dry up and you aren't as likely to go under in the event of a bad debt.
Take out bad debt protection: this will cover you up to agreed limits in the event of non-payment of an invoice. However, it is always worth checking the terms and conditions to see what is covered.

Bad debt protection is offered by a range of companies but the requirements for you to be eligible are very strict in terms of your own trading history and credit control procedures. Small and medium companies usually take out bad debt protection to work alongside a factoring or invoice discounting facility as the insurance company will know that your invoices are being well looked after and can offer better rates and credit limits.

Many of the factoring and discounting companies that Decision Finance work with have a bad debt protection plan in house.

In conclusion, late payment and bad debt are always going to be a feature of the business landscape but with a few practical steps and good management of your invoices they can be lessened if not avoided completely.