Businesses rely on stable and predictable cash flow in order to survive, compete, and thrive. Good business owners carefully manage the factors that they can control to keep revenues and expenditures steady, but often that doesn’t include taking steps to avoid and tackle bad debts. More than half of globally surveyed businesses are owed tens of thousands of dollars in unpaid invoices, and suffer because of it.

How to avoid bad debt e1461097885890 - Minimise bad debt to stabilise cash flow

Clients who pay late, or don’t pay at all, are an enormous threat to small businesses. For smaller businesses, the cost of legally pursuing bad debts is often greater than the debt itself, and even a simple delay in receiving payment can be dangerous for businesses. Even temporary cashflow interruptions can interfere with a business’ ability to serve its customers and provide a stable workplace to employees. Depending on the severity of the situation that could damage a brand’s reputation, slow growth, or even force businesses into bankruptcy. In order to protect themselves, businesses need to find ways to avoid bad debt, and to keep operations running when they run into trouble.

Don’t shy away from credit checks

Many small businesses don’t look into their clients’ credit histories, or take any real steps to determine their trustworthiness in terms of payment. To many small business owners, it can feel unfriendly not to give new customers the benefit of the doubt. What’s more, few businesses are often in a position to turn down business if they want to survive and grow. All of that, however, is no excuse not to be informed.

While a credit check is the best and most thorough option, people who don’t want to go that route do have other options as well. Simply go online and look up the public records pertaining to the business activities of the business or individual you’re considering a relationship with. You’ll be able to see if your prospective client has declared bankruptcy, and whether they’ve been involved in court battles related to financial issues with a simple search.

Write contracts carefully

Contracts need to be very explicit and exhaustive in regard to the financial aspects of your arrangement. This should go well beyond simply identifying clear payment due dates. Your contract should also clearly lay out what happens when a payment is late, including things like late fees, at what point services will be halted, and how debts will be collected

This isn’t just meant to give debtors a clear picture, it also provides a framework for your business to manage the client relationship. A business relationship that isn’t underpinned by a solid contract might be soured if you’re forced to suspend service to a non-paying client. That’s because the decision to stop serving a client is far more likely to be viewed as a personal judgment and attack when it’s made on a case-by-case basis by a business owner or manager, rather than predetermined by your contract.

Maintain communication

Keeping channels of communication open and active is important in any business relationship, regardless of whether there are payment issues. It’s particularly important in the latter case, however, because clients who are in financial trouble aren’t going to prioritise paying someone who they haven’t heard from in weeks.

Keep conversations open and honest, and always be proactive about maintaining that contact. If a payment is late, reach out immediately to find out what’s going on, and take any measures stipulated in your contract. Don’t make exceptions in regard to the latter, and follow up often to ensure that you stay on the debtor’s radar.

Invoice financing

While some preventive measures are certainly helpful, they can only protect you to a degree. Even very careful businesses have to deal with late payments and non-paying clients. One important tool that entrepreneurs can use to hedge against this risk is to use invoice financing. By financing (or factoring) invoices, you effectively transfer the risk to your financial institution.

Essentially, invoice factoring means selling an outstanding debt to your financial institution for most of its value. You get paid for the invoice right away, and your client is obligated to pay the holder of the debt. This arrangement works for businesses because they get paid reliably and right away, and works for financial institutions because they’re far better equipped to collect debts than most businesses.

With over 70% of invoices paid late worldwide, this is not an issue that business owners can ignore if they want to succeed. Australian small businesses operate under some of the least favourable payment terms in the developed world, and even then are often not paid until nearly a month after payments are due. By applying some of these strategies and tools, businesses can prevent most cashflow interruptions so they can spend more of their time and energy on growth, and less on trying to survive with an underfunded budget while chasing down late payments.

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