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What is a bad business debt and how can I avoid them?

Posted: 23 Oct, 2018

Working as a company director means that you’ll be responsible for the day-to-day running of your business and you’ll be required to keep a close eye on the financial state of your company. Whilst delivering a reputable service to your client base, it’s vital that you carry out the essential research and background checks before committing to deliver a service to your suppliers or end client. During the lifetime of a business, you may come across a number of challenging situations such as a bad business debt.

What is a Bad Business Debt?

A bad business debt is money that is owed to a company which won’t be repaid by the debtor. This could be due to insufficient funds or because the company has gone out of business. The money is essentially a lost cause and as a result, the creditor will not pursue the debtor.

The consequences of being owed a bad debt can be critical. If a business is depending on the owed money to pay the bills or suppliers, they may not be able to do so which puts them in a troubling situation. This could restrict cash flow and threaten the future of the company.

You can minimise the risk of a bad business debt by taking a number of steps before engaging with a business.

Spread your client base

Working for one large client may be profitable for the business, but this comes with a higher risk. If the supplier was to face financial difficulty, it would dictate the future of your business. If it was to go out of business, the consequence of this would hit your business, cutting off your stream of income.

By spreading your services across the market, you are also spreading the risk.

Carry out due diligence

Before stepping into an agreement or making any commitments, do your due diligence. If you’re looking to work with a Limited Company, the company accounts will be publicly available on Companies House. Take a look at their financial behaviour and the final balance to get an idea of your chances of being owed a bad debt.

Skim through social media

When it comes to customer satisfaction or dissatisfaction, social media is a great platform to source this information. Take a look through the profile of the business to spot any discrepancies or unhappy customers, this will give you an indication of the appetite of the business.

Review sites such as Trustpilot and Google are also valuable platforms which can show you the nature of a company from the point of view of the consumer or end client. If you spot any negative comments around late or missed payments, it’s an indicator which highlights a high level of risk.

Request payment first

As part of your payment terms, you may want to state that a deposit or first instalment is required before you begin work. By doing so, you will be able to recognise if the company is trustworthy as a financial commitment would be made. By requesting for a deposit to be made, if the business was to fail to make the final payment, the initial payment would compensate for a percentage of your time and effort.

It’s worth making the payment agreement clear. If you require the business to pay through instalments up to completion, the business will be made aware of this.

Make payment easy

If it’s difficult to source payment information, the business may procrastinate making a payment. State your account details clearly on each invoice that you send, so when it comes to making payment, it’s straightforward and prompt payment can be made.

If you engage with a large business, ensure that you have the correct details for the payroll department, including who the invoice should be addressed to. By doing so, you’ll be able to ensure that the end party has received your invoice and that payment can be expected.

If it’s a large order and you’re concerned about payment, schedule in some payment reminders to be sent prior to the payment deadline. This will prompt the business pay on time.

Bad business debt can be the downfall for many businesses so it’s worth taking a look at how you can reduce the risk and guard your business against falling victim to bad business debt.

Written by Keith Tully; partner at Real Business Rescue (part of Begbies Traynor Group plc). Keith is an experienced corporate insolvency professional and a prolific writer in the business advice space.

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