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Six Steps to Avoiding Bad Debt

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08 / Mar / 2013

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When and how you collect your debts can make or break your business.  We look at six steps for managing debt effectively and avoiding bad debtors.  As you will see, the secret is to have a good process in place for invoicing and collections rather than waiting until frustration drives you to the debt collector.

1. Invoice on Time
It’s easy for small businesses to get caught up with sales, marketing and delivery and leave “the paperwork” for later.  We sympathise with administrative woes, but the one thing you must get right is invoicing.

Establish a rigorous system to ensure that you invoice as soon as possible within your terms of trade.  The sooner you invoice your clients, the sooner you will be paid.  Every dollar you collect from your clients is a dollar less you will need to borrow from the bank or scrounge from the line of credit on your house.

2. Make it Easy to Pay
Give your customers as many methods of payment as possible.  The easier it is to pay, the quicker your customer will hand over the cash.  Credit card and Paypal merchant fees can seem expensive, but not as expensive as waiting 60-90 days for your customer to write a cheque.

3. Conduct Credit Checks & Set Credit Limits
It can feel awkward to ask for credit references, but most customers won’t balk at giving you 2-3 credit references and if they do you may be better off without them.  A sale that turns into a bad debt is far worse than no sale at all.

Also consider how much you are willing to risk on each client – always remember that providing goods and services before you have been paid is a risk.  Set a fair credit limit for each client and ensure that your staff is aware that you must approve any sale that exceeds this limit.

4. Be Clear and Clever About Your Terms of Trade
It’s important that your customers understand when and how they should pay you.  The easiest way to communicate this is to have a simple “Terms of Trade” document and ask your customer to sign off on it before you start doing business.  Now he knows what to expect and he also understands that you take being paid seriously.

Make sure you think through your Terms of Trade.

  • Make it clear that ownership does not transfer until payment is made.
  • Consider incentives for early payment, ie/ a 5% discount on payments within 30 days.  Then be firm and don’t allow the discount when payment is late.
  • If you are providing a service that takes a long time to deliver consider terms that require some payment up front or part way through delivery.

5. Send Statements & Reminders Regularly
We are back to the paperwork again.  Don’t let the invoice be the last time a debtor hears from you before you have to get heavy handed.  The practice of sending regular statements (weekly if necessary) is critical to timely payment.  Think about it from the customer’s point of view.  They get heaps of invoices every week.  So which ones are they going to pay first: those that don’t seem all that worried or those who appear professional and serious about debt collection?  You can be sure that the companies sending regular statements and reminders will be paid before the rest.

6. Talk First, Debt Collector Later
If you are doing everything right and still not getting paid then your first step should be to talk to your customer and find out why.  If the customer has a temporary cash flow problem then you may be able to negotiate a repayment schedule.  If so, be sure to confirm the agreement in writing.

If all else fails you can turn to a debt collection agency.  Before you do give the customer a final call to let them know.  There’s a strong chance they will finally realise you are serious and pay up.

Image courtesy of freedigitalphotos.net

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