Today’s volatile business environment makes it more important than ever for SMEs to shore themselves up against bad debts. The suspension of insolvency laws early in the pandemic may have held debt problems at bay, but this prop no longer exists. Fortunately, there are plenty of ways businesses can reduce the risk of bad debts hanging around like the last person to leave the office party.
How can an SME prevent bad debts?
Clearly, it’s best to avoid bad debts in the first place wherever possible. There are several ways to do this, including:
- Conducting background checks
Before dealing with a new client, it’s important to know they have capacity to pay. The Australian Government’s ABN Lookup is a good place to check basic credentials. Or download ASIC’s Business Checks app, which runs through some simple checks to validate information about potential business partners. You can also purchase more detailed information about a business’s credit history through companies like Equifax, Illion and Experian.
- Controlling your credit terms
Businesses routinely offer each other credit but allowing terms of 30 days or more is essentially like providing business finance to your clients. Review your credit terms regularly to ensure they’re still appropriate for maintaining good cash flow. Make sure your terms (including details of any prepayments or discounts for early payment) are stated clearly in writing to all your customers, and that staff know what they are. Ideally, get acceptance of your terms in writing.
- Managing receivables well
Invoice early and regularly. Offer clear, flexible options that make it easy for customers to pay you. Maintain records of what each customer owes and note when any are approaching their credit limit.
How can I recover debts?
To ensure your business has adequate cashflow to pay staff and cover your own debts, it’s vital to have a strategy for debt recovery. Have a clear process for collections, including timings and messaging of communications in the event of late payment.
Set up regular payment reminders and maintain records of all correspondence. If necessary, you can send a formal letter of demand.
What can I do if a customer refuses to pay?
Unfortunately, many businesses will experience this situation at some point. If a dispute arises, seek payment of any non-disputed amount to support your cashflow. You could hire a debt collection agency if your customer continues to refuse to pay. You can also take legal action in this situation. ASIC’s website lists organisations that provide legal help to recover debts.
Before you choose to pursue a debt, you’ll need to weigh up how much you’re owed against the cost, time and effort this will involve.
Invest in bad debt protection
Prevention is always better than debt collection, but it can also pay to have protection. Adding bad debt protection to your Invoice Finance solutions secures your business against the risk of bad debts arising from situations outside your control, such as customer insolvency or inability to pay. You can even choose coverage for key customers whose business accounts for a large portion of your turnover, safeguarding your cash flow.