Your risk of incurring a bad business debt rises significantly in a turbulent economy.

A bad debt is one that’s unlikely to be paid back. You’ll most often incur a bad debt when a customer or another debtor goes out of business without paying you.

If you can’t collect money, then the amount can be written off as a business expense. But this has an impact on your business.

Bad debts reduce your cash flow, they make it harder to pay creditors and, in extreme circumstances, they can push you into insolvency.

How to avoid bad business debt

Giving your customers credit can build loyalty and lead to bigger orders, but you need to make sure you offer credit in a way that protects your business.

Even if you follow this advice, it would be foolish to think that you’ll never incur a bad debt again. But implementing these processes could drastically reduce the risk.

Check new customers

You want to know that someone is reliable before you lend them money. You can do this by asking for trade or bank references, or by completing a credit check on new customers. It’s a good idea to do this every so often with existing customers too. That way you can stay on top of any financial changes.

Set credit limits

Setting a credit limit is a great way to protect your company from big losses. You should try to set a credit limit based on the customer’s credit check, not just the level of trust you have in the owner.

Make your terms clear

Don’t bury payment terms deep in your contract. Make sure you state them clearly up front and print them in multiple places, including on your invoices. This helps communicate your business boundaries, so that everyone is on the same page.

Send invoices quickly

Don’t wait until the end of the month to send out an invoice. Send it as soon as you’ve finished the work. This helps communicate urgency, which can rub off on your debtor.

Chase payments vociferously

There’s no excuse for paying late. Following up with emails, letters and phone calls sends a strong signal to debtors that you won’t be pushed around and can significantly reduce the chances of you getting a bad debt.

And remember to be realistic

Unfortunately, the odd bad debt is a cost of doing business. These tips can help reduce the risk of incurring a bad debt (and at the very least they will get you paid quicker). But you should still plan for bad debts, making sure they don’t expose you to too much risk.

For more information about bad debts, including what you can do about them, speak to a member of our business debt advice team today. Call: 0800 611 8888.