What is bad debt and how can I protect my company?

What options do I have if my business has bad debt?

Bad debt presents an insidious threat to the financial stability of your business. It places strain on your working capital and creates uncertainty in paying your bills, but this can be addressed successfully if you take proactive steps to protect your company.

By being aware of the negative effects of bad debt, and how to prevent it, you offer your business the best chance of success and positively impact profitability. So how does bad debt occur and what can you do to protect your company?

What is bad debt?

When an invoice isn’t paid and you can’t recover the money owed to you by your debtor, it may need to be written off. This is called a bad debt, and it means that a service or product has been provided by you but not paid for.

When multiple bad debts occur it’s a warning sign that you need to put in place efficient debt collection procedures. Maybe you haven’t been chasing payments rigorously enough, for example, or your systems could need updating to provide more detailed information on late payers.

So what can you do about the situation to move the business into a more positive position?

Protecting your company from bad debts

Invoice and chase overdue payments quickly

Invoicing as soon as you’ve completed the work or order can encourage faster payment and help you avoid a situation where bad debt is taking over. Similarly, chasing overdue payments as soon as they’re late is a fundamental part of preventing bad debt.

Clarify your terms of payment

Presenting clear payment terms, including the timeframe in which invoices must be paid, reduces the chances of debtors letting you down. You should also state the action that you’ll take in the event of late payment, including the interest rate you’ll charge on outstanding debts.

Develop an efficient credit control system

Using software to manage your credit control eases the process of chasing payments as you can schedule letters and reminders, and obtain a broader view of how much is owed to the business.

Invoice finance as an effective safeguard against bad debts

Invoice factoring is a form of alternative funding based on the value of your unpaid invoices. The significant benefit for businesses in danger of losing money through bad debts is that the lender also manages your credit control function.

This can relieve the pressure to constantly monitor payments coming in from debtors and provide regular inputs of working capital. Around 85 - 90 per cent of each eligible invoice is released by the lender, usually within 24 hours of issue.

Another option to help your company could be bad debt protection, which an invoice funder may add to your agreement. Given the number of businesses entering insolvency, this could provide additional protection against the threat of a substantial bad debt.

For more information on protecting your business against bad debts, please get in touch with UK Business Finance. We’re established commercial finance brokers and can guide you towards the most appropriate funding for your needs.