As a business owner, you know how crucial it is to protect your business from bad debts and ensure positive cash flow. Cash flow issues and the debt that they cause is the number one reason that Australian companies fail. How can you protect your small business from bad debts and unpaid invoices? Here at Niche Trade Credit, we’ve been helping business owners in the Sydney area protect their companies from insolvency and debt collection with insurance solutions. In today’s article, we’ll explore the different ways you can protect your business from an unpaid debt.
- Credit Applications
You don’t want to have to deal with chasing after customers over unpaid invoices. The first step to reducing your risk of bad debts and experiencing future cash flow issues is to have every new customer fill out a credit application form. A credit application form should include the following information:
- Their full business details.
- Trading name and ABN.
- How long they have been in business.
- If they have any credit guarantors.
Consider asking for and contacting bank references, and any details of the new customer’s suppliers. You could also require the customer to sign a director guarantee. Be sure to check if the customer’s business is registered with the Australian Business Register.
- Conduct a Thorough Credit Check
If you need to extend credit to a new customer, it’s critical that you conduct a thorough credit check. Many reputable agencies conduct credit assessments. The cost of a credit check will depend on how much information you are looking to gather. You can also find a lot of information about a potential customer and their trustworthiness via online, third-party review sites.
- Impose Clear Credit Terms
Most businesses use a standard 30-day term for credit, but you’re free to impose any conditions you like for your business. Make sure that the conditions you impose are clear, in writing, and that all parties involved understand their obligations.
When setting the terms, make sure to include:
- The credit limit
- Late-payment interest
Companies usually review the terms as the relationship with the customer evolves. It’s reasonable to give flexibility to older, valued customers as opposed to new customers.
When you invoice customers, make sure that your instructions are clear, and that no room within the invoicing instructions would give customers an opportunity to delay payment. For example, entering the wrong amount for payment, or failing to include important bank details can lead to a delay. An airtight invoice can help you avoid this risk, and always make sure to invoice promptly and send any follow-up reminders if needed.
- Debt Collection
Partial payments or even late payments are better than no payment or the added expense and stress of legal action. If a customer is failing to honor an invoice within the terms they’ve agreed to honor, the first step you’ll want to take is to send them a letter of demand. In the letter, offer a payment plan via installments as an option. Getting the customer to agree to an installment plan and honor their commitment is far less stressful than taking legal action.
However, sometimes it’s not possible to get a customer to agree to installments. If this happens, you can hire a debt collection agency or take further legal action. Before you commit to either option, you’ll want to weight the costs of these services vs. the chances of recovering the debt from the customer.
For added peace of mind, you can always purchase a tailored trade credit insurance policy for your business. Trade credit insurance will cover part or all of your accounts receivable depending on your needs. In the event of non-payment, your cash flow is protected with a trade credit insurance policy. At Niche Trade Credit, we’ve been helping business owners protect their cash flow from insolvency through insurance solutions. Please contact us today to speak to one of our brokers about trade credit insurance services.
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