Bad debts are all too common in business.
Sometimes it happens due to inexperience, sometimes we ignore the warning signs, and sometimes it can be totally unpredictable.
However, it happens, bad debt is bad for business. But it’s not all doom and gloom. Bad debts can be avoided or recovered (when you work with the best in debt collection business) and you can learn from them.
While bad debt can occur for many different reasons, often there are some warning signs that we’ve either ignored or missed, so in this article, we’ve put together a list of the common warning signs that you and/or your accounts team can keep an eye out for so you can avoid bad debt from damaging your business.
Before we dive right into the warning signs, let’s talk about bad debt and what we actually mean by that.
What is bad debt?
The word debt doesn’t often paint a pretty picture, in fact, for many people, they dread the word or even the idea of debt.
But debt is a part of everyday life for many people. It’s fundamental for many of the processes of the world, especially when you have a business. And while we associate debt as being negative, not all debt in your business is bad, some of it may even be considered good.
That’s because this debt allows your business to function, it enables you to buy goods for your business and continue to run, and if you have debts owed to your business, depending on your payment terms, they may result in interest for your business too.
A debt is bad when it is owed to you and you’re unable to collect that debt. Usually when this occurs, it means you’ve extended your credit to a customer, you had an agreed upon payment date, however, they either didn’t pay in full or at all and did not discuss this with you. You’ve also likely followed them up and tried to recoup the debt owed.
Why is bad debt bad?
Bad debt is bad because depending on how often this occurs in your business or the expenses your business has, it can put a significant strain on your business.
It can impact cash flow, which can them impact your ability to buy more stock for your business, to pay your workers, and to hire new staff.
While bad debt can have a very serious impact on your business, as well as on you personally, it’s important to remember that there are services out there that can help you, like debt collection agencies.
Why does bad debt happen?
Bad debt can occur for all sorts of reasons. It could be that your business has been targeted by fraudulent people, your customer cannot pay their bill, or because you have engaged in business with a customer that isn’t suitable for your business.
Having a robust credit policy in place for your business is one way that you can avoid bad debt or at least lower the instances of it occurring. This can be particularly helpful when signing up new customers.
And when it comes to existing customers, there are some signs to keep a vigilant eye out for so you can potentially avoid bad debt causing issues in your business.
Bad Debt Warning Signs
Here are some of the behaviours and signs that could indicate a current customer’s debt could end up being a bad debt for your business:
1. The customer indicates that there are cash flow problems
It’s important to listen to those that you do business with. Whether it’s in a fleeting conversation or you’ve called them to follow up on a payment, make sure you always listen to what they are actually saying.
For example, if they have missed a payment, ensure you ask why the payment was delayed or missed. In some cases, it may have been a simple oversight but in other cases they could be having financial issues – whether it’s due to business being slow or their own customers being slow to pay them.
Being aware of their business position can be a good indicator their payment habits.
2. Lack of or changes in communication
There’s always going to be some customers that you communicate with more than others. That’s ok, it’s normal. But make sure to keep an eye on any changes you notice in the way in which a customer communicates with you.
In some cases, their tone may change, or they may contact you less frequently – or they may even avoid taking your calls or responding to any emails from you.
There may be simple explanations for changes in communication, but unresponsiveness for periods of time is not only unprofessional but also could be an indicator that things are not to stable at the business.
If you’re unable to get in touch with your debtor, we recommend that you do not extend any further credit, continue trying to contact and get in touch with a debt collection service.
3. Sudden staffing changes
If your customer’s staff changes significantly, it could be a sign of bigger problems. Of course, staff members leave businesses all the time but if you notice a high turnover of staff or even important leadership team members leaving, keep an eye on the situation.
There may be internal problems, or they may have even been poached by a competitor which could indicate that the business may have some new competitors on its hands.
It’s important to note that staff changes are not always an indication of negative things and could also show that the business is hiring new people due to its growth.
4. Changes in payment habits
If your customer suddenly stops paying or starts paying late, this could be an indication of something being wrong.
As we mentioned earlier, sometimes payments are accidentally missed, and it could just be an oversight or mistake. One way to determine this is to try to get into contact your customer. You can discuss the reason for the late payment and set a deadline for the payment with them.
If you’re unable to get in touch with them, this could be a sign that there are issues at play, and you should monitor the account.
5. Slowing of the economy
Changes in the economy, such as increases in the cost of living and changes to exchange rates can impact businesses significantly. Depending on the industry of your business or the industry of your customers, this could result in unpaid debts.
In these cases, your accounts team should be keeping a watchful eye on all accounts and flagging any accounts they believe could be at risk.
How to avoid working with potentially bad customers
While it’s not always possible to see the signs of a bad customer, having good business processes in place makes it a lot easier to weed out the dodgy customers.
Below are some of the things you should do to protect your business:
- Scrutinise the background and track record of potential customers. Do not sign anything or make any agreements until you’ve performed a credit check report at the very least.
- Establish clear terms. Every business that extends credit, whether it’s in the form of money, services, or products, should have a clear payment terms and contracts in place.
- Ensure the customer understands the payment terms. Having the payment terms and contracts in place is one piece of the puzzle, the other is ensuring that the customer understand these terms and the information is clear to them. The last thing you want is to find out months down the track that your new customer has no idea what the deal is.
- Trust your gut. Our instincts may not always be 100% accurate but in many cases, if you’re concerned about something, there may be a valid reason for this. If you’re unsure about a potential new client or their behaviour, ensure that you manage the account very closely.
- Seek professional help. Sometimes, no matter the precautions you’ve taken, you just end up with a bad customer and some bad debt. In that case, we recommend seeking help from professionals like us here at JMA Credit Control. We’re debt collectors with more then 60 years of experience collecting debts for businesses in Australia. We not only recover debts, but we also help businesses manage their credit processes along the way too.
Call JMA Credit Control Today
Bad debt can really hurt your business, but it doesn’t have to be debilitating. With the right business practices in place and supportive services, like ours here at JMA Credit Control, you can recover bad debts and keep your business running smoothly.
If you’re struggling with bad debt, call us today.