How to avoid bad debts?

Every business faces late payments or even bad debts one day or another. When everything has been attempted to recover the amount due but the debt remains unpaid, it must be considered irrecoverable.

Whatever the sector of activity, this risk exists and every entrepreneur must take it into account. Bad debt, like any overdue invoice, has obvious consequences on a company's cash flow, leading to a decline in profitability. Without the financial income necessary for the operation of a business, whatever its size, its development can be compromised. Every entrepreneur must therefore take the bull by the horns from the start and protect themselves against unpaid debts.

Why and how do bad debts arise?

In B2B, your customers may themselves experience late payments. They may face supply chain issues that slow deliveries of the components they need to make the goods they sell. Your client's bank line of credit may have been withdrawn, reducing their operating capital. The market may have suddenly declined, impacting its sales and overall business model.

In B2C, your customers may be faced with financial difficulties, temporary or otherwise. No one is safe from loss of income, health problems or family difficulties.

And in recent years, these problems have become even more numerous. The health crisis due to Covid-19 and its economic and social consequences have impacted both your B2B and B2C customers. The war in Ukraine and its economic and energy consequences are once again impacting your customers: delivery times, inflation, insecurity, etc.

You may also have placed your trust in a customer who did not deserve it. A customer misrepresented themselves to place an order that they did not intend to fulfill. If this is the case, you need to either strengthen your client acceptance policy or account for these questionable clients in your financial plan. Taking risks is necessary for any business development but taking calculated risks.

Prevention is better than cure!

A late payment should always be considered a signal. An analysis is required and above all a reaction, because a late payment can in certain cases turn into an irrecoverable debt.

It is therefore important to take into account possible payment delays and protect yourself from the start. Structure your payment terms to encourage prompt payment. Impose payment deadlines and directly announce the risks incurred in the event of delay. Be firm and do not procrastinate on payment deadlines and other clauses. An invoice is due when due. In the event of late payment, send a reminder directly to your customer reminding them of your conditions and the consequences incurred by their delay.

Some customers only pay upon reminder. With a clear timeline and regular reminders, you'll find that a client who is juggling payments is more likely to prioritize you over a company with less structured billing tracking. Make sure your invoices are always “on top of his pile”, priority for payment.

Here are some tips for avoiding bad debt:

• Send your invoices and statements on time, preferably as soon as the job is completed or the product delivered. Businesses have established payment cycles. So billing quickly means you're less likely to miss the next cycle.
• To ensure the overall health of your business, keep up-to-date records of what each client owes you and note any clients who are approaching deadlines.
• Send a reminder immediately whenever an invoice is overdue, regardless of the amount. No matter the size of your business or the amount of your debt, a service has been provided or a product sold and it deserves to be paid.
• Stay tuned to your customers. Behind every late payment is a customer, regular or not. Adapt your billing follow-up depending on the case. You can choose to grant or refuse additional time, to claim late payment interest or not, for example.

If, despite this, your debt remains unpaid, seek advice from a debt collection agency on the most effective way to recover the money owed to you. Entrusting the recovery of your doubtful debt to a third party is a sign of seriousness for your customer. Often, a simple formal notice is enough to make him react, obtain payment in full or establish a settlement plan that works. Sometimes other amicable or legal steps will be necessary. But very often, you will quickly recover your debt and thus avoid having to consider it unrecoverable. Don't take your cash lightly!