How to protect your small business from bad debt

Sylvia Pennington

You did a good job, in good faith and now your client’s said they’re strapped for cash or they’ve gone AWOL, leaving your calls and emails unanswered…

Tardy creditors and bad debts can bring a small business to its knees. So what can you do to minimise the chance of being owed big bucks by bad payers?

Prevention is better than cure

If you want to predict the future, the past is a good guide – so it pays to check a new customer’s form before letting them rack up a big bill.

Consider doing a business credit check or ask around informally. Industry contacts and other suppliers may know whether they’re likely to pony up promptly or keep you hanging until Easter.

If you’ve been commissioned to do a large or lengthy job, taking progress payments will reduce the size of the final tab – and the risk to your business if it’s not paid.

Agreeing payment terms up front is also vital if you don’t want to wait months, once you’ve completed an assignment. It’s hard to argue against a customer’s 90-day policy if you’ve failed to specify you need to be paid in 30.

Time is money and if payments are late you lose both – so consider sweetening the deal for prompt payers by offering a discount or gift, New Age Legal Solutions small business lawyer Katherine Hawes suggests.

“Research has shown that even as little as four per cent discount increases the rate of quick payments,” she says.

Research has shown that even as little as four per cent discount increases the rate of quick payments.

Spring into action

If you want the money in your bank, not earning interest in theirs, don’t sit on your hands once an account moves from current to overdue, managing director of credit bureau CreditorWatch Colin Porter advises.

“Being quick, proactive and consistent is imperative in combating bad debt,” he says.

Should initial reminders fail to trigger a remittance, consider ratcheting the pressure up a notch with a final notice outlining the consequences of not paying their bill – default and legal action.

“In most cases, just taking some action helps to speed up the process immensely,” Hawes says.

“Pick up the phone, call the client that owes you money and just ask for it… Sometimes a simple phone call or email can reduce the tension and you might learn the client has non-business related issues and is planning to make a payment anyway.”

And if your DIY efforts come to naught and the debt is sizeable consider placing it in professional hands. Debt collection services typically charge a commission of five to 30 per cent to recover money on your behalf.

Sylvia Pennington

Sylvia Pennington is a Brisbane-based freelance journalist who writes about small business, information technology and personal finance.

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