Steering your business clear of bad debt requires a two-pronged approach. You need to be smart in your invoicing processes and be attentive to your customers. We take a close look at how to collect debt from customers and reduce the risk of customer debt impacting your business.
Quick takeaways if you’re in a hurry
1. Putting in place payment agreements and plans, credit limits and incentives can encourage your customers to pay their bills
2. It’s a good idea to prepare your business for how you will react if a customer’s invoice remains unpaid
3. Communicating openly with your customers will reduce the risk of late payment and encourage them to keep you up to date if they are struggling to pay an invoice.
Read on: How to collect debt from customers
All business people accept that there is a chance that a customer may be unable to pay a bill. But you don’t just need to be aware of the risk: you can actually take steps to reduce it by introducing good invoicing practices and proactively managing your payment relationships.
Encountering bad debt doesn’t need to be a situation that takes you by surprise. Prepare a process for dealing with an unpaid bill and you will be ready to take action if you need to.
We’re going to take a look at the steps you can take to avoid bad debt from your customers.
1. Set yourself up for success
If your expectation is that you’re going to get paid on time, you need to ensure your invoicing processes are organised and timely so that you don’t cause any delays. Here are some key steps to getting on top of your invoices.
Payment terms. Create payment terms with your customers when you begin your relationship. By jointly signing a written agreement you can be confident that you’re both working within the same timeframes and expectations.
Set credit limits. If your business is at risk if you have an unpaid bill over a certain amount, then you might benefit from setting credit limits with your customers. This can work for an individual invoice amount and also across multiple invoices to ensure your levels of risk don’t escalate.
Credit checks. It’s important to credit check all of your customers – even those that you think you know and trust. Customers don’t aim to go bankrupt, but you need to protect your business in case they do. Credit checking can highlight if there have been any past issues with payment that you should be aware of. It’s worth setting up a schedule to refresh them regularly – customers can suffer from debt issues after you’ve entered into a relationship so it’s up to you to keep information updated.
Reward and penalise early and late payment. As part of your payment terms you should consider including incentives for payments that are received early or on time, and/or penalties for late payments. This is an important part of demonstrating to your customer your expectations regarding their payments.
Invoice processing. If you would like to receive payment from your customers on time then it’s important to get your systems working efficiently so your invoices are never late. You can choose a simple template process or invest in invoicing software. Automation will help to make your processes more efficient and timely.
2. Focus on your customers
Being the best that you can be at communication with your customers will increase the chance of you receiving payment on time. Here are some straightforward ways to optimise your communication.
Get to know your customers. If your customer has more than one employee then it’s important to take some time to understand who is in charge of processing invoices and what they need from you to ensure that they can make a payment on time. Establishing a point of contact upfront will allow you to build a relationship and also gives you direct access when you need to chase a payment.
Keep track of payment behaviour. Customers are unlikely to default on their first bill, but tracking their payment behaviour can indicate when there is an increased risk of non-payment. Use a database to profile your customers and the way that they pay your invoices. Changes in their behaviour could provide an early warning to financial problems and allow you to ask them directly what’s happening before bad debt becomes an issue.
Communicate openly. Regularly communicating with your customers will allow you to build a relationship and proactively manage the process of getting your bills paid. You are less likely to have issues with late payment and you’re also more likely to be kept informed if your customers are going to struggle to pay a bill.
Be flexible. Your payment agreements will protect you against serial offenders, but if your customer asks for flexibility with a payment then you can decide whether you will help. Be aware that support that falls outside your agreement could challenge your future position. But flexibility could help you to secure your most loyal customer for the future. If in doubt, it’s worth taking legal advice.
3. Be prepared
We all hope to avoid bad debt, but it’s worthwhile investing time in being prepared just in case we have to deal with it. You can set up a process for managing late payment and ensure that your customers are aware of exactly how you will proceed. Canvas your business network, advisors and mentor for feedback and advice on how they think non-payment should be handled.
Take a look at your options and make a decision about whether you would prefer legal representation or to use a collections agency. Both can prove expensive, so it’s worth evaluating costs as part of the decision process. There will be a point where the value of the invoice is less than the cost of collection. It’s up to you set thresholds for the level of debt that you will chase.
If customers fail to meet the terms of your agreement and show no indication of making payments, take time to make one final phone call to try to rectify the situation. Indicate to your customer that if they cannot make immediate payment, possibly with instalments or if you prefer in full, then you will proceed down a legal path. Sometimes this may be enough to get the situation resolved.
The first stage in collection is a legal letter notifying your customer that their payment is officially overdue and you will now be taking action to recover your money. Again this can be a valuable trigger to payment, but if you still get no response you will need to progress to debt collection.
Unpaid bills can result in poor cash flow and lasting damage to a business. It’s important to protect yourself from non-payment by ensuring you have done everything possible to encourage your customers to pay. Being proactive in communications gives you much more change of being paid, or being informed if there is an issue with payment so you can react accordingly. Plan your debt collection processes in advance so you are able to react quickly if you need to.
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