How to avoid bad debts?
Whatever the sector of activity, this risk exists and every entrepreneur must take it into account. A bad debt, like any overdue invoice, has obvious consequences for a company's cash flow, leading to a drop in profitability. Without the financial income necessary for the operation of a company, whatever its size, its development can be compromised. Any entrepreneur must therefore take the bull by the horns from the outset and protect themselves against non-payment.
Why and how do bad debts arise?
In B2B, your customers may themselves experience late payments. They may face supply chain issues that slow deliveries of the components they need to make the goods they sell. Your client's bank line of credit may have been withdrawn, reducing their working capital. The market may have suddenly gone down, impacting its sales and overall business model.
In B2C, your customers may face financial difficulties, temporary or not. No one is immune to a loss of income, a health problem or family difficulties.
And in recent years, these problems have become even more numerous. The health crisis due to Covid-19 and its economic and social consequences have impacted both your B2B and B2C customers. The war in Ukraine and its economic and energy consequences are once again impacting your customers: delivery times, inflation, insecurity,...
You may also have placed your trust in a client who did not deserve it. A customer has misrepresented himself to place an order that he does not intend to honor. If so, you need to either strengthen your customer acceptance policy or factor these questionable customers into your financial plan. Taking risks is necessary for any business development but take calculated risks.
Prevention is better than cure
A late payment should always be considered as a signal. An analysis is essential and especially a reaction, because a delay in payment can be transformed in certain cases into bad debt.
It is therefore important to take into account possible late payments and protect yourself from the start. Structure your payment terms to encourage prompt payment. Impose payment deadlines and directly announce the risks incurred in the event of delay. Be firm and do not prevaricate on payment terms and other clauses. An invoice is due when due. In case of late payment, send a reminder directly to your customer reminding him of your conditions and the consequences incurred by his delay.
Some customers only pay by reminder. With a clear timeline and regular reminders, you'll find that a customer who juggles payments is more likely to prioritize you over a company with less structured billing tracking. Make sure your bills are always "on top of his pile", priority for payment.
Here are some tips to avoid bad debts:
- Send your invoices and statements on time, preferably as soon as the work is completed or the product delivered. Companies have established payment cycles. So quick billing means you're less likely to miss the next cycle.
- To ensure the overall health of your business, keep up-to-date records of what each client owes you and note any clients who are approaching deadlines.
- Send a reminder immediately when an invoice is overdue, regardless of the amount. No matter the size of your business and the amount of your debt, a service has been rendered or a product sold and it deserves to be paid.
- Stay tuned to your customers. Behind every late payment is a customer, regular or not. Adapt your billing follow-up depending on the case. You can choose to grant or refuse an extension, to claim late payment interest or not, for example.
If despite this your debt remains unpaid, seek advice from a collection agency on the most effective way to recover the money owed to you. Entrusting the recovery of your bad debt to a third party is a sign of seriousness for your client. Often, a simple formal notice is enough to make him react, to obtain payment in full or to establish a clearance plan that holds water. Sometimes other amicable or legal steps will be necessary. But usually, you will quickly recover your due and thus avoid having to consider it as uncollectible. Don't take your cash flow lightly!