Dealing With Bad Debts: Tips For Small Business Owners

Bad debt refers to money that is owed to a business or individual that is unlikely to be paid back. This can occur for various reasons, such as the debtor going bankrupt, facing financial difficulties, or disputing the amount owed. When a creditor believes that a debt is irrecoverable, it is written off as a bad debt in the accounts. This means that the creditor acknowledges that they will not receive the money and removes it from their list of assets. It's important for businesses to manage and minimise bad debts as they can have a significant impact on cash flow and profitability.

Here are some strategies to prevent bad debt.

Credit Checks: Before offering credit to a new customer, conduct a thorough credit check. This will give you an insight into their financial stability and payment history.

Clear Payment Terms: Ensure that your payment terms are clear from the outset. This includes the amount due, due date, and any penalties for late payment.

Advance Payments: For larger orders or services, consider asking for an advance payment or deposit. This reduces the risk of non-payment.

Regular Invoicing: Send out invoices promptly and regularly. Ensure that the invoices are clear, accurate, and have all the necessary details.

Follow Up: If a payment is overdue, follow up promptly with a reminder. The longer a debt remains unpaid, the harder it can be to recover.

Payment Plans: If a customer is facing temporary financial difficulties, consider offering a payment plan. This allows them to pay off the debt in smaller, more manageable instalments.

Document Everything: Keep detailed records of all transactions, agreements, and communications. This will be invaluable if you need to take further action.

Review Accounts Regularly: Regularly review your accounts receivable to identify any potential bad debts early on.

Limit Credit: If a customer has a history of late payments, consider limiting the amount of credit you offer them or ask for cash on delivery.

If a customer fails to pay their bill, here are some steps you can take:

Send a Reminder: Begin with a polite reminder. It's possible the customer simply forgot or overlooked the invoice. Ensure the reminder includes the invoice details, amount due, and due date.

Contact the Customer: If there's no response to the reminder, make a direct phone call or send an email to discuss the outstanding payment. This gives the customer an opportunity to explain any issues or concerns.

Offer a Payment Plan: If the customer is facing financial difficulties, consider offering a payment plan. This allows them to settle the debt in smaller, more manageable instalments.

Late Payment Charges: If your terms and conditions allow for it, consider adding late payment charges or interest to the outstanding amount. Ensure you communicate this to the customer.

Send a Formal Letter: If the above steps don't result in payment, send a formal letter of demand. This letter should clearly state the amount owed, any added charges, and give a final deadline for payment.

Engage a Debt Collection Agency: If the debt remains unpaid, you might consider hiring a debt collection agency. They will take on the responsibility of recovering the debt, usually for a fee or percentage of the recovered amount.

Mediation: If there's a dispute over the bill, consider mediation. A neutral third party can help both sides come to an agreement.

Legal Action: As a last resort, consider taking the customer to court. Before doing so, weigh the potential recovery against the cost, time, and potential damage to your business reputation.

Write Off the Debt: If all efforts fail and the cost of recovery is higher than the debt itself, you might choose to write off the debt as a bad debt in your accounts.

Review Your Credit Policy: Use this experience as an opportunity to review and possibly tighten your credit policy to prevent similar situations in the future.