bad debt

Don’t Let Bad Debt Drag You Down

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 2 minutes

Bad debt can cripple your business. In the current economic climate, there’s a great deal of financial uncertainty for firms extending credit to customers. In some cases, debts amount to only a modest sum, which is an irritating inconvenience. But if the amount is large it can cause your business to fail. There is no way of guaranteeing you won’t be hit by bad debt, but there are steps you can take to avoid the problem.

What is bad debt?

A company in negative credit owing money to a creditor. Businesses one way or another often find themselves in debt, they’re in debt owing money to a supplier, or having equipment on finance. A bad debt is something that offsets your cashflow and is something you weren’t expecting. This could come through, broken machinery or a larger than expected tax bill.

  • Check out new customers by taking trade references and undertaking a credit check.
  • Allocate a credit limit based on your findings, and stick to it.
  • Issue your invoices promptly. If you are too busy to do this, outsource the work.
  • Have a system for chasing overdue payments. The procedure should become progressively tougher until you are paid. Alternatively, you could hand the matter to a solicitor or debt collector.
  • Review existing customers regularly and be alert to warning signs. These could include a gradual slowing down of payments, offers of payment on account, etc.

bad debt

What can I do if I do have bad debt?

In conclusion, bad debts deliver a double whammy. It’s not just their immediate impact on cash flow and profitability, but the loss of an on-going customer, and consequential reduction in turnover. If you suffer a bad debt you should do the following:

  • Take professional advice promptly to establish whether your business can ride out the storm, and how you can buy time with suppliers, the bank, your landlord, the taxman, – and if you can raise finance.
  • If you are convinced you can survive you need to establish a plan to replace the business turnover which has been lost, or downsize capacity to reduce overheads
  • Try a formal repayment plan such as a CVA – A procedure designed to allow you to better manage your outgoing payments all into one pool.

In summary

Bad debt is often unavoidable, it doesn’t matter how much success you’ve had as a business, sometimes these things happen. The key is making sure that you have the right businesses process in place to deal with the problem as best as possible and tackle the issue head-on. Aside from the work you can do yourself, the rescue procedures are there to help struggling businesses.

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