Prevent Bad Debt in Business With These Helpful Tips

man looking relieved at desk

Debt is part and  parcel of owning and managing a business, whether it’s a small enterprise or a large corporation. That being said, this shouldn’t stop you from trying to avoid getting into compromising situations that could put your business at risk.

5 Steps to Stay Debt-free

Do background credit checks of potential clients

Most small business owners don’t bother checking if they are dealing with an honest customer or not. In fact less than 20% of business owners bother to do so. The online survey is only the tip of the iceberg, but it does give us an idea of why business owners struggle with cash flow. Many wait too long before asking to be paid and this is often the cause of a good business going under.



Doing a credit background check is, of course, entirely up to you but the benefits definitely outweigh the disadvantages. Thoroughly checking one’s credit history can help you decide whether it would be worth transacting with this person or not. A person’s financial history such as loans taken or how many times they’ve paid bills on time (or late) will show up in a credit report. With such useful information within one’s reach, it is quite a shock to know that this is not commonly practiced among business owners.

Your terms of trade should be legally enforceable

All too often business owners enter into a transaction without thinking about setting up a contract between themselves and the client. If they do, the terms and conditions may not be in
the best interest of the business owner. Having a terms of trade professionally written will be very beneficial for your business since it will outline and state in detail how the transaction will transpire:

  • You should state when you would like to be paid. If this is an ongoing transaction, you can set the due date every first Friday of the month, for example;
  • Be clear about how you would like to be paid. While cash is definitely the best option, many businesses seem to favour online transactions nowadays. It is a hassle-free option for both the client and owner. Money gets transferred real time and you can easily monitor your accounts as all information is automatically saved by the bank
  • You should also state what you intend to do when the client misses a payment. Will there be overdue fees? How about interest rates?
  • If the client refuses to pay or ignores any of your payment reminders, you should also state that you will enlist the help of a professional debt collector and might even have to head to court if the need arises.
  • You should also state that the client will be responsible for fees incurred by the debt collection agency and the court.

These terms of trade will only be legally binding when both you and the client sign the contract. A terms of trade agreement will very likely reduce any future overdue accounts and bad debts in your business.

Review outstanding receivables

Many business owners, especially those that run small businesses, tend to forget to check if there are any outstanding receivables from clients. Sometimes these business owners work alone or with a handful of employees thus preventing them from going over the books every now and then.



If you don’t follow up payment once the due date has passed, the likelihood of recovering debt diminishes over time. After two months, the chances of recovering debt is pegged at around 80%. At 6 months, the percentage goes even lower to almost 50% and at 12 months it’s down 25%. While these are general numbers, the answers are still glaringly the same: if you don’t act quickly, running after unpaid invoices will pose a bigger problem down the road.

Communication is key

Be proactive and set up an automated email to be sent out to the client a day before payment is due. This will remind them of their unpaid invoice. If the due date has passed and they haven’t made any payment, give them a call to find out why. They will have most likely lost the invoice or maybe even forgotten about it, despite your earlier reminder. This might be a one-time incident but you shouldn’t let your guard down.

What’s important as this point is that you and the client are on the same page about when the payment should be made. Before ending the call, ask when the client intends to pay and how much. Make a note of it.

When it’s time to call a debt collection agency

Even when you have been proactive and have taken necessary steps to prevent your business from getting bad debt, once the client missed the second opportunity to pay you then it is safe to
assume that you are dealing with a dishonest person.

Enlisting the help of a professional debt collector will lighten the burden of having to run after bad debt. It will transfer the responsibility to a debt collection agency who will work on your
behalf. An agency that has years of experience under its belt is one you can count on to engage with a client in a polite and business-like manner.

For the debt collection to be a success, you should be able to provide accurate and updated information about the client and transaction especially when the debt in question is a few years old. This will greatly help the agency in their pursuit of debt recovery.

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