How to Avoid Bad Debts: 8 Debt Prevention Tips from A Debt Collection Expert
Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia.
Our task at Debt Recoveries Australia is to collect debts. However, as we come into contact with a lot of credit departments and accounts receivable systems and processes, we also get to see how debts come about in the first place and how they can be avoided.
Wouldn’t it be great to prevent all that bad debt from happening in the first place? But how? What tools should you put in place at the beginning to minimise outstanding debts?
We coach many clients on debt prevention strategies, so I thought I might share some of these prevention tips with you.
1. Choose Your Clients Carefully
I know this sounds obvious, but when I first started out in business, I took any client I could get in order to win business, thinking that a busy office would mean success and big profits. Wrong! It led to low morale, low customer satisfaction and low profits, since I was not picking and choosing the clients that I wanted to work with. I learnt I am more comfortable servicing a particular client and so I now stay within our niche client base and we do not stray from that.
So you need to choose your clients carefully. Work with your sales department to create an ultimate profile of the perfect client for you and then only take on those clients you want to work with. Once you have chosen your client, conduct credit reports/searches on the company and the directors. Check their websites, social media sites. Ring their clients and ask them about your potential clients. Look for red flags in their finance department and see how much you can learn about their financial health before you do business with them.
2. Get Tighter Control
Once you have chosen the right client and you are happy with the credit checks and financial status, you now need to put tight credit controls in place. Tight credit control is your first line of defence to avoid bad debt. It’s the best way to avoid or limit your exposure to bad debts by a few simple steps:
- Complete thorough business and reference checks (if not done so already) before you offer credit to new clients.
- Get them to agree to personal guarantees and sign credit application forms ( see this link on our website for a free credit application template).
- Make sure you have credit control documents. We have a free credit control pack for you: https://debtrecoveries.com.au/credit-control-free-template-pack/
- Set reasonable but fair credit limits.
- Include clear payment conditions in your terms of trade agreement.
All of this needs to be done first, before you make any deals with your client. If they don’t agree to your terms, don’t do business with them.
3. Money Upfront
Ask for money upfront before providing any goods or services. Again, sounds so simple and most of my clients are more than able to do this, but they don’t. Why? My theory is that a lot of clients under-value their products and services. They are too scared to upset their customers.
In my opinion, by asking for money up front, you are sending a strong message to your customer that you are serious about your services and serious about payment. They will respect you for it.
Organise a direct debit system so your customer can pay in advance. Insist on payment up front for any goods being delivered. Consider adjusting your system to fit in with this: for example, following up as soon as you realise your payment has been missed out – or calling in advance to ensure that a cheque will be issued.
4. Set Your Payment Terms and Penalties
It’s amazing how many companies I have come across that have no payment terms at all and no penalty fees. How do they expect to get paid?
You must set clear and obvious payments terms and make sure they are set out and explained in plain English. Structure your payment terms to encourage prompt payment. For example, you could offer a 5% discount for payments made within 30 days or charge interest on outstanding balances.
Make sure your terms of trade specify when you will start to charge interest on overdue amounts and the rate of interest you will be charging. Warn your client that you may also charge them a recovery fee and/or legal fees incurred in recovering the debt. Again,this should be clearly stated. See our website link for terms and penalty fee template: https://debtrecoveries.com.au/credit-control-free-template-pack/
Your terms of trade will only be enforceable if you ensure customers sign their acceptance before you extend them any credit. Alternatively, have a think about a check box on your website, where they agree to your terms. Implementing your terms of trade to new customers is important. Also consider sending customers your terms at the beginning of each year as a reminder.
5. Strict Processes for Payment and Follow Up
By making it clear that you expect to be paid on time, every time, and always making contact if payment is late, you’re more likely to be front of mind when customers schedule payments. This means a customer juggling payments because of cash flow problems is more likely to give you higher priority than a business whose systems are more relaxed. Many people or businesses ‘pay the ones that make the most noise’. Within reason, make sure this is you.
If your terms are 14 days ( and this is what I recommend for EVERY client. Given our technology these days, 14 days is a reasonable time for payment to be made), then ring them on day 14 and ask them where payment is. Have a documented, automated system for follow up. I recommend Debtor Daddy. If you want some great debt collection software to manage your own debts, try Debtor Daddy.
6. Stick to Your Terms
Stop supplying customers who haven’t paid their accounts on time. You can use the fact that they need your goods or services as a lever to get paid promptly. This might cost you some business, but it will also reduce the risk of being exposed to bad debt.
Similarly, stop supplying goods to customers in excess of their credit limit. This doesn’t mean that you won’t increase the limit if requested, but it gives you the opportunity to reassess the creditworthiness of your customer before increasing your debt exposure.
If you say you are going to charge interest and penalties for non-payment, then charge them. Ensure you customer knows these charges have been added.
7. Fix Disputes Quickly
Resolve any disputes quickly. Customers will often use the dispute as an excuse for non-payment. You are unlikely to be paid until you promptly resolve the dispute.
Reconsider the terms on which you do business with customers that regularly dispute or pay late: for example, increasing the prices you charge them or cancelling their credit facility.
8. Use Debt Collectors or Lawyers
If all else fails, then debt collection agencies or a debt collection lawyer will help you find the most effective way to recover your debt.
Once you hand the debt over, there’s a strong possibility that the customer will realise you’re serious about chasing the debt. They will often pay up straight away – in full or in agreed instalments. Most times a letter from a lawyer or agency is enough to do the trick.
Which among these debt prevention tips will you start implementing today?
Debt Recoveries Australia is the expert at recovering your outstanding debts without the drama. For more information, email us at email@example.com or call 1300 799 511. Tell us your problems on Skype at “debtrecoveries”.