The Cost of Bad Debt to Your Business

past due letter

Debt is a part of owning and running a business. In fact, debt is crucial in enabling many businesses to actually operate.

Owning a business also involves a lot of trust, and this trust goes hand in hand with debt. When your business provides goods or services to a customer, there is an element of good faith in place. This good faith is that they will stick to the terms of your trading agreement (if you have one) and pay their invoices for the goods or services you’ve provided.

Now, let’s take a step back to talking about debt. Almost every business will have a portion of debt – it’s a legitimate technique for managing cash flow. Your customers will have debts, as will your business. These debts generally allow businesses to buy services and goods as they need and then pay later. And with strong and clear trading agreements, this can go off without a hitch!

However, sometimes it doesn’t – when customers stop paying their invoices and leave you in the lurch, this is bad debt, and can affect your business (and you) significantly.

Keep reading to learn what the real cost of bad debt can be to your business, as well as ways that you can avoid bad debt from occurring in the first place.

The importance of cash flow in your business

Bad debt restricts cashflow and your business’s ability to operate

Your business is nothing without cash flow. You need this to be able to operate. And when customers stop paying their invoices, the first place you’re going to notice a problem is in your cash flow.

The income your business receives is used all over the business, from paying peoples wages and purchasing stock or services to conduct your own business, to actually being able to pay any of your own debts.

If you end up being unable to pay wages, you might be forced to lay off people from your staff, which can further reduce your business’ ability to provide goods and services – which can be a very nasty cycle.

While your business may have cash reserves that you can rely on to be able to operate day to day, if this is depleted, it can lead to your own business falling into (more) debt and can even stop your business being able to operate at all.

Again, this is where a lot of trust comes in when you own a business. You trust that your customers will pay for your goods and/or services on time and having to trust others can be scary. That’s one of the reasons why it is important for you to have a clear term and conditions agreement in place.


Bad debt can lead to insolvency

If bad debts get out of hand and you’ve ended up having to rely on other cash reserves or perhaps get into debt further, this can lead to insolvency for your business.

This again, is where having a terms and conditions agreement in place can help. It gives you something to fall back on and provides clear terms for doing business with you.

It’s also important to plan for as many possibilities as you can. You don’t want to have to give up all of your hard work because a customer has caused a bad debt for you. We’ve put together some handy information about the ways you can prevent bad business debts and also about the red flags to keep an eye for when it comes to customers and paying their debts.


Bad debt can take up resources

Not only does bad debt directly impact your cash flow, but it can also indirectly impact it. That’s because when you have outstanding debt, you or other people working in your business are distracted from the day-to-day tasks and instead spending time on trying to recover these debts. This means that the output of your business may be decreased, which might mean that you are unable to provide as many services or goods as you normally would. It might also affect your ability to dedicate time to winning new customers and expanding your business.

You might also be incurring fees if you’ve hired an external service like a lawyer to help you recover your debts. If you are going to outsource your debt recovery efforts – which we recommend that you do – it’s a good idea to work with a debt collection agency who has the know how to recover debts fast and effectively. You can learn more about the benefits of outsourcing your debt recovery here.

Bad debt can be stressful

A reality of bad debt is that it adds pressure to your business, which can lead to stress. This stress can be financial stress, and it can also be physical and mental stress for you.

Running a business involves a lot of different responsibilities which can already be stressful enough. So, with the added stress of debtors who can’t pay, you can find yourself struggling to keep up with everything required of you.

While you may not be able to avoid every bad debt, there are some steps you can take to reduce the chances of it from occurring and make managing bad debt easier.

paper that says "debt free" posted on a corkboard

How you can minimise the risk of bad debt for your business

We’ve listed some of the steps you can take to lessen your chance of bad debt from occurring in the first place.

These steps include:

  1. Know who you’re doing business with

Before you get into business with someone, why not do a little due diligence and have a credit check run on them. This should highlight their history of repayments and may show any red flags.

  1. Set up terms and conditions and trading agreements

Having a terms and conditions document essentially outlines what it takes to do business with you. Your agreement should include payment terms and timings. If they don’t like your trading terms, it might be a sign that you shouldn’t be doing business with them.

  1. Offer payment incentives and rewards

A common practice of many large companies is offering incentives for paying for their goods or services. This might involve a percentage discount off the invoice if paid early, or perhaps special pricing for upfront payments. These discounts can add up for your customers and they can also ensure that you’ve always got cash flowing.

  1. Get credit insurance

Credit insurance can be a great way to protect your business from delinquent customers. Many policies will cover you for when customers become insolvent and can give you peace of mind.

  1. Work with professional debt collectors

If you do find yourself with bad debts from delinquent customers, work with a professional debt recovery agency, like us here at JMA Credit Control. We have the know how to recover debts in a wide variety of industries for businesses of all sizes. We work with businesses all over Australia and can help make your life easier today.

Give us a call today to discuss your business needs.

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