It is almost impossible to not incur debts in a business. However, it is very much possible to avoid bad debts. First and foremost, what are bad debts? Bad debts are sometimes referred to as Uncollectible Accounts Expense, and they refer to an amount of money owed to a creditor which has unlikely chances of being repaid. It could also be that the creditor is refusing to collect the payment due to reasons ranging from liquidation to insolvency.
A bad debt, just like it says in its name, is bad for your business. You should do everything within your power to avoid instances of bad debt in your company. Why is this so? This is because it could mean something bigger i.e. liquidation or insolvency.
But here come good tidings; here are a few major tips on how to avoid bad debts in your business:
BE CAREFUL IN PICKING CUSTOMERS:
One of the major mistakes new businesses make is thinking that everybody has to be their customers. This is impossible, every one cannot patronize your business. This does not in any way mean that your business will fail, or you wouldn’t make a profit; in fact, having a small number of dedicated customers could be all your business needs to succeed. This is why it is important to pick out the customers or clients that you’d like to work with. Asides enjoying peace of mind, it becomes easier to serve your customers. After picking out your customers, it is important to conduct a credit report check on the company, and on their directors also. Check out their past clients, credit history, loan repayment history, and so on. Check their social media pages, and reviews from past customers. If possible, call old clients and have them tell you about this company. You can also set credit limits, especially for new customers. However, you must keep this low so as not to scare away new customers.
All of these credit and background checks come at zero price and are completely legal.
ASK FOR UPFRONT PAYMENT FROM CLIENTS:
This might seem like an old trick, but trust me, it is just as important as it was in the days of old. Before providing any services or goods, always ask for upfront payment. This might seem risky, but think about it, the customer or client who understands the value you are providing will jump at the offer. Also, asking for upfront payment makes your customer understand something very important: you value your business and are very serious about payment at the same time. This will also help you curb customers who cannot afford your services, therefore avoiding bad debt. To make this easier, you can create a system that allows a half or quarter payment before the service or good is provided. Do not be flexible with payment. Remember that payment for goods and services is the major source of revenue for your business. Flexibility will only lead to debts, which have the potential of becoming a bad one in the long run.
SET TERMS AND CONDITIONS FOR PAYMENTS:
It is both scary and unprofessional to find out that most companies do not have payment terms and conditions, or even penalties for late payments. You have to set clear payment terms in understandable English. Why is this important? It is because it will give customers an idea of the operation of your business as regards payment, and how serious you take it. You must also draft these terms and conditions to show that you value prompt payment, and would not tolerate late payments. To attract customers, you can also make use of discounts on payments made during a certain period. For instance, customers who complete payment within 15 days will have a discount of 10% or more.
Furthermore, you can charge your clients for late payments, but this is only possible if you have stated it clearly in your terms and conditions. It could be in the form of interests, or recovery fees, legal fees, and so on. It could be all of these merged into one. However, you must state it clearly in your terms and conditions. If you do not, your clients could hit you with a lawsuit, or even damage the reputation of your company. Most importantly, after adding an option to accept or reject your terms of payment, add a space for signatures. In the event of an update in the terms, you must inform all your customers so as not to have issues of disputes in the future.
ESTABLISH RIGID PROCESSES FOR PAYMENT:
Always remind yourself that bad debts could ruin your business, so take payments as seriously as possible. When payment is late, contact the customer immediately. Remind them of the payment, offer them the payment options available, and ask for a specific date when payment should be expected. If you do not remind your customers, how do you expect the ones that have forgotten to pay you? It’s just logical that you have a system in place that reminds clients of payments as soon as it is due. It is a believed rumor that clients pay the businesses who make noise the most; you should aspire to be that business at all times.
Honestly, it is almost impossible to avoid disagreements with clients. It is a natural part of running a business. However, what should be avoided are disputes that are not settled or fixed as soon as possible. You have to understand that some clients will do anything to escape payment. To avoid being a victim of this sort of manipulative behavior, you must fix all disputes with clients as soon as possible.
Conclusively, you can also hire professional advisers who will give you a professional opinion on how to get debts that are giving you problems. You can also bring in the services of a solicitor or a debt collection agency. Remember, payment is king.