Avoid bad debtors with these easy steps

(Updated: 9 May 2023)

When a business extends credit to a supplier or customer, they run the risk of incurring bad debt which in turn can create cash-flow problems. Although it is nearly impossible to eliminate the risk of bad debt, there are steps a business owner can take to avoid it in the first place.

What is bad debt and how does it impact your business?

Bad debt can be classified as a receivable you are unable to collect because your suppliers or customers are unable to or show no intention of paying the amount owed. This typically occurs when a supplier or customer purchases a product or service on credit instead of paying for it up-front.

When your suppliers or customers fail to settle the account, that amount becomes an expense that your business must cover instead of income your business was expecting to receive. If left unchecked, bad debt can accumulate, preventing companies from taking on growth opportunities, make their own payments, and increases the risk of bankruptcy.

In this article, we will explore what steps you can take to avoid falling prey to bad payers:

1. Setup a clear credit policy
   When taking on new suppliers or customers, it is important to make them aware of your credit policy and payment terms. You can do so by incorporating the terms on invoices, statements, and online platforms such as your website. This will help you to protect your business and make it easier for you to enforce those terms when necessary.
2. Assess creditworthiness through a credit check
   Before extending credit to a new supplier or customer, it is important to run a credit check on them. It is through a credit check, that you can gain clearer insight into their previous paying behaviour, identify any issues with late payments, or past bankruptcies, and view their current credit score. Credit checks can help you make informed decisions regarding credit worthiness and is the first step to avoiding bad debt.
3. Setup reasonable credit limits
   Once you have determined a new supplier or customer’s credit worthiness, it is important to set up reasonable credit limits. By doing so, it can help you further protect your business, whilst you establish how reliable they are when it comes to repayments. Only when you have confidence in your suppliers’ or customers’ ability to be a good payer should you start increasing their limits.
4. Place delinquent accounts on hold before it is too late
   Giving a supplier or customer the benefit of the doubt by keeping their account active when problems with payments start to occur may seem like a good idea, this could not be farther from the truth. Instead, you should place their account on hold as soon as payment issues arise to minimise the level of bad debt you may potentially suffer. Further to this, it is important to note that suppliers or customers may be able to pay back smaller amounts owed sooner than larger amounts.
5. Nip invoice disputes in the bud quickly
   Should a supplier or customer be unsatisfied with your products or services, they may potentially delay payment, refuse payment, or dispute the invoice received. When this happens, you should act quickly to resolve the dispute by negotiating a resolution that satisfies both parties, whether this be by providing a partial refund or by giving the client a discount on future orders. Reaching a resolution quickly may reduce the risk of the disputed invoice from becoming a bad debt.
6. Setup resilient collection tactics
   When it comes to your credit or payment terms, it is important that you and your staff be strict and ensure appropriate action, as outlined in your terms, is taken from the start when client’s miss a payment. Any lapses in your credit control procedures may be taken advantage of, and your inability to enforce your credit terms could be taken as leniency by a customer. Therefore, you should always follow up any action you threaten, such as placing the supplier or customers’ account on hold or pursuing legal action against the client for non-payment.
7. Add a buffer in your budget
   It is inevitable that businesses will encounter slow-paying or non-paying suppliers and customers, despite the many fail safes put in place. Therefore, it may be a good idea to add a buffer into your budget each month to ensure you have enough cash on hand to manage expenses. This way, your business won’t be heavily impacted should a client suddenly be unable to pay.

How MarisIT Can Help You 

The more information you have on your suppliers and customers, the better your decisions will be on whether to grant credit or not. MarisIT’s credit vetting service employs the use of products that are contained within the MarisIT online system, these products access the major credit bureaus.

Here you’ll find information on poor payment reports, judgements, their debt review status, and other relevant information to assist you in assessing your prospective customer. It also features products such as account verification, credit authorisations, deeds office access and bank codes.

You should remember that a potential customer is only going to give you their best paid creditors as references. You can also consult industry groups to see if the potential customer has come to you because your competitor will not extend any further credit to them.

With our credit reports, you can get current, comprehensive information on every business and credit active adult in South Africa.

What Our Credit Reports Offer

4 Standard Information Fields:

• Identification information
• Credit history (including collection items)
• Public records
• Credit related enquiries

Information obtained:

• Comprehensive business credit profile
• Default listings, judgements, and notarial bonds
• Business trade references and contact details
• Business bank account information and codes
• Business statutory and comprehensive trace data
• Business registration and trading information
• Directors’ information, id information, civil court requests and notarial notices
• Addresses
  • Current and previous physical and postal addresses
  • Telephone contact information

Other benefits

• Reduced exposure to bad debt and business failures
• The ability to set appropriate credit limits and trading terms
• The ability to identify risk

Conclusion

At the end of the day, being prepared and taking the necessary steps to safeguard your business from bad debt can mean the difference between business success and business failure. Make informed decisions with MarisIT’s credit vetting solutions today!