Five steps to prevent bad debts

As a small business, bad debt can be a financially painful and even disastrous experience, especially if cash flow is tight. When it comes to bad debts, prevention is always better than the cure, particularly when it comes to the impact on customer relations. As a small business owner, there are a number of steps you can take to prevent late and non-payment from happening in the first place.

Check their credentials

For larger transactions, conducting a credit check on a potential customer can give you some idea of their ability to pay on time. Companies such as Dun & Bradstreet can provide varying levels of credit and financial reports for both businesses and individuals. Alternatively, it may be viable to speak with industry contacts such as other suppliers or business owners. In some cases, you may be able find out about customers who have a frequent habit of making late or non-payments.

Upfront payments

For large sales or long-term projects, it may be advisable to ask for partial upfront payments before delivering the product or service, according to Small Business NSW. For example, a business may ask for a 25 per cent upfront payment before beginning a project, with the remainder to be paid on completion.

In the event the client fails to pay in full, your business will still have recouped some of the losses. Alternatively, it may be possible to ask for staggered payments, with customers invoiced for each stage of a work project. This can be especially useful for freelancers and contractors who may need a regular source of income while working on the project.

Agree on payment terms

Where possible, ensure you have an agreement in writing regarding payment policy. This not only provides clarification to your customers, but can also assist in the event of legal action. Invoices need to be professional and detailed, listing each specific charge and how it relates to the products or services your business provides. It is also extremely important to detail payment terms and payment options on invoices - otherwise, your customers may decide to pay by their own terms!

Offering incentives to pay on time can also be effective, such as discounts for early repayments. Alternatively, attaching late penalty fees or interest can motivate customers to pay on time or reap you financial compensation for late payments, but it may also damage the relationship with your clients.

Communication

In many cases, customers who fail to pay on time may have simply forgotten the matter. If you don't hear back from a customer shortly after sending an invoice, follow the matter up. Send regular but polite reminders by mail or email. If the customer fails to respond, try calling. However, avoid any form of harassment or even publicly "naming and shaming" late payers - this is not only unprofessional, it can expose you to legal action.

Record keeping

With so many other duties to tend to, small business owners can often fall behind on collecting payments. Ensure you have an efficient, up-to-date database of customers and outstanding payments. Accounting products such as MYOB usually include invoice records software, or you can use a generic spreadsheet product.

Of course, if all else fails, you can take the next step outsourcing your debt to an experienced debt collection agency. This allows you to receive more cash sooner, focus on core functions and reduce your operating costs.

View more information on D&B's debt collection services here

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