What is bad debt?

Simply put, having a bad debt means one of your customers hasn’t paid for the goods or services provided and (where credit has been extended) the money is deemed uncollectible.

There are a broad range of reasons for having bad debt. Perhaps you have extended credit to an unsuitable customer or there may be issues with the goods or services provided. Often, in these difficult financial times, the reason is simple: your customer cannot pay due to bankruptcy or insolvency.

How can bad debt affect your business?

Frequent bad debt can cause your business serious financial difficulties, including poor cash flow, problems with creditors, reputational issues, meagre business growth and even, insolvency.

How can I prevent bad debt?

Every business will have a different approach to credit control. But while completely avoiding late payments is not always realistic, making sure that your paperwork is as complete as possible is fundamental to protecting your business.

Read on to discover our top tips for proactively preventing bad debt:

Top Tip 1

Provide clear terms and conditions that are tailored to your business

Providing your customers with clear terms and conditions of sale is essential for protecting your business from delayed payments, customer disputes, poor cash flow and unnecessary money spent on recovery.

Including insufficient or incorrect information in your T&Cs, or not making them specific to your business, could cause confusion for your customers and leave your business with little recourse if there’s a dispute.

Top Tip 2

State your T&Cs on all relevant documentation

Establish firm boundaries for your customers by ensuring your terms and conditions for sale are clearly stated on your website and all relevant documentation, including the signed order form or agreement and the invoice.

Avoid accidental breaches by sending polite reminders throughout the process with T&Cs attached.

Top Tip 3

Make your payment details easy to find

Having your payment details clearly shown on your order forms and invoices, along with clear guidance on how to make a payment, can help encourage your customers to pay on time.

Where possible, it’s also worth offering your customers a variety of payment methods – the more ways to pay, the easier it is for your customers to pay you on time.

Top Tip 4

Use proof of delivery notes effectively

A proof of delivery note can be a major trigger for credit disputes. Missing signatures, late delivery or mismatches with invoices can have a huge impact on overall credit control.

Ensuring that proof of delivery notes are signed and that invoices are issued as soon as delivery has taken place can make all the difference in getting paid.

Top Tip 5

Discuss your T&Cs at the point of sale

Improve your chances of being paid without issues by making your customer aware of your terms and conditions at the point of sale and ask them to agree.

By waiting until goods or services have been delivered, you are opening your business to disputes and late (or non-) payment.

Top Tip 6

Ensure your own team understand your T&Cs

Ensuring your own team understands your terms and conditions of trading, including when invoices become due and any late payment charges, will reduce the risk of your customer having misaligned expectations, and you being paid late (or not at all).

Top Tip 7

Have any changes agreed in writing

Having a clear process for updating an order or agreement protects your business and ensures there are no surprises when it comes to a customer paying the bill.

Where changes are requested, don’t be afraid to ask your customer to confirm their agreement in writing (and re-send your terms and conditions).

Top Tip 8

Be clear about the consequences of late payments

Dealing with late payments can be tricky, but it’s important to maintain a good relationship with your customers.

Be clear and transparent from the outset that if payment terms are not met, the invoice will automatically be passed to an external collector for recovery.

Top Tip 9

Familiarise your team with the debt recovery procedure

Completely avoiding late payments is not always realistic, but effective credit control can help minimise the risk. The more familiar your team is with your debt recovery procedure, the more effective they can be in helping you manage any potential risks.

Top Tip 10

Appoint a single person for instigating debt recovery procedure

Having a single member of staff (or small team) manage credit control within your business can dramatically reduce your risk of incurring bad debt. When overdue payments are dealt with promptly and efficiently by someone with clear responsibility, it lets the rest of your team focus on the day-to-day.

Pairing these top tips with a good credit control system will help you reduce the risk of bad debt losses and assist you in achieving a balance between timely payments and happy customers.

As always, early communication is key. If you think your business is experiencing cash flow issues, or you would like more information on bad debt, we are here to help. The earlier you seek professional advice, the more options available to you and your business.

Find out more

Here are a few helpful links if you want to find out more about this topic:

A complete guide to credit control (Experian)

Options if you’re owed money on official Gov.uk site

UK SMEs write off £5.8bn of bad debt (Treasurer Magazine article)