How to Prevent Bad Debt: Tips for Businesses

As a business owner, the last thing you want is to end up with bad debt and unpaid invoices. However, it can be hard to predict when a customer may not be able to pay you. Fortunately, there are steps that businesses can take to prevent bad debt. Here are six of them:

Communicate Your Expectation Upfront

Communicating your expectations upfront is one way to protect your business’s financial health. This means establishing clear credit terms and making sure all parties understand their obligations. This may include specifying a credit limit, payment terms, and late payment interest.

To achieve this, ensure that your credit terms are prominently displayed on your website and included in all relevant documentation, including signed agreements and invoices. This way, all parties will be aware of the credit terms from the beginning, which can reduce confusion and minimise missed or late payments.

Run Credit Checks

Not all customers are good for business. Some may have a history of missed or late payments, making it risky to extend credit to them. Conducting credit checks can help identify these potential issues before extending credit. This can be done by requesting the customer’s credit report from a reputable credit bureau and carefully reviewing their payment history and current financial situation.

Even if you’re satisfied with your customer’s financial situation, make it a habit to continually monitor their creditworthiness. Their situation may change over time, increasing the likelihood that they will default on payments. Staying informed and regularly reviewing their credit reports can help prevent surprises and avoid bad debt.

Request Upfront Deposits or Partial Payments

This may seem blatant, but requesting upfront deposits or partial payments can actually help prevent bad debt. By receiving some form of payment before delivering goods or services, you can establish a clear agreement and eliminate any confusion about payment expectations. This will also allow you to assess a customer’s financial stability before committing to a transaction. What’s more, if there are any unforeseen delays or difficulties, this financial cushion will make it easier to resolve the situation without incurring bad debt.

Stay on Top of Invoices

Another effective way to prevent bad debt is to stay on top of invoices and statements. As soon as they become due, send them out to customers and make sure there are no errors in the instructions that could delay payment. This also means following up with customers in a timely manner if payments have not been received.

To help you stay organised with invoices, you can consider setting up a system for tracking outstanding invoices and setting reminders for follow-up communications. This way, you’ll avoid unnecessary delays or confusion, ultimately leading to successful and timely payments from customers.

Buy Trade Credit Insurance

For added peace of mind, you can always purchase a tailored trade credit insurance policy for your business. This 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 this policy. At Niche TC, 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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