What is a bad debt?

A bad debt occurs when a client owes money for a service or product provided and the money cannot be recovered. This sum is essentially lost and must be written off as a bad debt. 

A high level of bad debt indicates that the current process for invoicing and collecting payment is not effective. Businesses need to be proactive to protect themselves from these debts and manage them to reduce the impact on cash flow. 

How can a business avoid bad debt?

1. Update your payment terms and conditions. 
2. Ensure that clients know your payment terms by specifying clear terms that are set out at the beginning of the transaction or working relationship. It also offers protection if a debt is not repaid and you are required to take legal action to recover the debts. 
3. The terms and conditions should clearly set out time frames in which invoices become due, such as 30 days after services are provided, and detail when you will start to charge interest on overdue payments and the rate of interest you will be charging. 
4. You should ensure your client accepts these terms and conditions before beginning any work for them. 
5. Arrange for payment on account if appropriate.
6. Asking for money upfront is a simple but effective way to ensure payment. It allows you to refuse to start work until payment is made, providing an incentive to pay. If this is not possible, settle for a deposit upfront and agree a date for the client to pay the balance. 
7. Invoice regularly.
8. Ensure you are sending invoices on time with clear details on how to pay and to whom it is payable. Make sure you are including the bank details on every invoice and a reminder, and if possible, give clients the option to pay via your website to make it quick and easy for them. 
9. It is a good idea to use invoices as an opportunity to include a reminder of the payment terms the client has agreed to and specify when payment is required by. 
10. Adopt a credit management system 

Implementing a credit management system will reduce the risk of incurring bad debts. This could involve:

1. Assessing the creditworthiness of a new client by carrying out a credit check. This applies to existing customers too, as their financial position could change without you being aware.
2. Checking Companies House for information on accounts, mortgages, and directors. 
3. Considering whether the usual payment terms are suitable for each client. They may need to be adapted to fit the schedule of the client, for example, if your payment cycle is 30 days but they pay other businesses on a 40-day cycle. After all, if the client is happy with the service they receive they will be more willing to pay the bill. 
4. Regular reminders of the debt owed. 

Should you require any further information or assistance in relation to bad debts then please contact our Debt Collection team on:
01245 453810 or claudia.hubert@birkettlong.co.uk
 

We are holding a free webinar on Debt Collection Options - To register or find out more click here