Minimising your risk to bad debts
Bad debts cause huge problems for small businesses and, in the most extreme cases, can lead to the failure of the business. To minimise your bad debt risk it is imperative that you have good systems in place to assess the financial position of your customers before you supply goods or services to them and to ensure you get paid as soon as is possible. This blog gives our top tips on avoiding bad debts:
1. Assess customers’ creditworthiness and set appropriate credit limits. You can ask new customers for trade references or pay for an online credit check. Consider setting a lower credit limit or even asking for payment up front for new customers until you are confident that they can and will pay you on time.
2. Draw up clear terms and conditions. Make customers aware of them and get customers to agree to your terms of trade. Publicise your terms on your website and send a copy with your goods and invoices. Include a clause stating that you continue to own goods until they have been paid for, and requiring customers to draw your attention to any delivery problems promptly. Remind customers that you have a statutory right to charge interest on late payments (even if you do not plan to enforce this right).
3. Check where and to whom you should send your invoices; you may need to send it to the buyer for approval before it will be paid or direct to the company’s accounts department.
4. Send your invoices promptly and start chasing payments as soon as they become due. Actively chasing overdue debts is a vital part of minimising late payments. The sooner you do this the sooner it should be paid.
5. Resolve any disputes quickly (eg if the customer claims the goods were faulty). You are unlikely to be paid until this is done.
6. Reconsider the terms on which you do business with customers that regularly pay late: for example, increasing the prices you charge them or cancelling their credit facility.
7. Involve your professional advisors if your attempts to recover the debt are unsuccessful. Your solicitor can chase the debt for you or recommend a debt collection agency. A solicitor’s letter may be enough to prompt payment without any further action. Small claims (for up to £5,000) can be dealt with relatively quickly and inexpensively using the small claims track.