Bad payers can be highly detrimental to your business as they affect your bottom line and increase the risk of default within your company. Business owners often make the mistake of extending credit to customers before they have properly assessed the worthiness of said client – this sort of assessment is an invaluable tool when tracing a bad payer.
There are two types of customers that have the potential to become bad payers. First, you need to be aware of the risk involved with new customers. Taking on a new customer always poses a risk as you do not have any history on the new addition. The second type of potential bad payers revolves around customers who infrequently use your products and services. It is essential for your business to be aware of both types and to monitor the potential within each. There are often warning signs that customers will become bad payers, so you want to be aware and catch the problem before it escalates.
Early warning signs
Businesses often have a sense when someone is going to be a bad payer. Procrastination is a general feature of bad payers and can be a worrying sign. These individuals often postpone meetings and take a long time to return calls. You want to exercise a great amount of cation with these customers and be aware that they have the potential to be a bad payer.
Another sign that a bad payer is on your horizon is a sudden change in payment habits. If a customer suddenly makes late payments, then something is awry. You need to set clear and serious deadlines and if these are not met, be prepared to take serious steps.
A poor credit history does not necessarily indicate a bad payer, but responsibility needs to be taken for past mistakes. Bad payers often provide convincing reasons why it’s not their fault they have not been financially successful in the past and have accumulated excessive amounts of debt.
Excuses are a clear warning sign of bad payers. If you hear “I’m waiting for my customers to pay me” or “We haven’t received the invoice” or “The person you need to speak to is not available” be prepared to escalate the process of collection as the creativity of bad debtors will continue to rise.
Knowing the early warning signs of debtors is invaluable to the survival of your business. Next, we have put together a list of tools you can use to recognise bad debtors and some methods you can use to get your bad payers to pay up. The key is to remain vigilant and move quickly when red flags appear.
Tools and methods for bad payers
Before extending credit the first step you should always generate a credit report and get as much basic information like financial statements, identity documents, and records.
Your business should already have analytical measures (financial ratios, poor credit records, etc.) in place to recognise debtors and warning signs. At MarisIT we offer comprehensive Trace Reports to help your business trace bad payers, trace non-payers and track down bad payers. This not only minimises possible risks and losses, but also ensures the growth and prosperity of a business.
Think of generating a clear and concise Credit Policy if you haven’t already. In it you should clearly define, to whom you’ll extend credit, the credit limits and the procedures for granting credit and debt collecting. From here, you should create a Credit Application form. Your application form should contain standard terms and conditions of trade – this is the basis of a sound business relationship between a business providing a service or granting credit to a customer. This will also safeguard you against any liability and assists with any case where debt recovery needs to occur.
There are a variety of methods to get your money from bad payers such as charging interest on late payments, sending reminders, suggesting payment installments and offering your debtors deals.
However, the most effective method if you have a debtor who is unresponsive and appears unwilling to pay off their debts, is to threaten to report debtors to credit bureaus. This can help you to receive some response as a poor credit rating is not something any business would want. MarisIT can assist you with this by sending a final demand letter to a non-payer, and subsequently notifying them of your intention to list them as a defaulter on a credit bureau. A final demand letter is necessary before you can list a bad payer on any credit bureau. When it is sent to a non-payer, it notifies them of your intention to list them as a defaulter on a credit bureau. You can list a defaulter 28 days after the final demand letter was sent by post. This an efficient method to get your money from your debtors as it places a target on their back.
The bottom line is that bad payers can really affect your business and can often spiral out of control quickly. By being aware of warning signs and acting quickly, you can avoid racking up debt. At MarisIT we help protect your business by offering credit risk management solutions. Get in touch today for a solution from a partner you can trust.