June 14, 2024

Tips to Help Small Businesses Deal with Bad Debt

3 min read

Bad debt is unhealthy for companies of any size. However, it can be crippling to small businesses. Bad debt represents goods or services that have been provided but not paid for. It represents a lack of cash flow. Having too much outstanding debt on the books can ultimately lead to a small business’s demise.

Judgment Collectors is a Salt Lake City collection agency that specializes in making good on court judgments. In their time in the industry, they have seen just about everything. They say that, while it is nearly impossible to avoid all bad debts, small businesses can take some steps to minimize it.

If you are a small business owner, here are some tips to help you deal with bad debts from both the prevention and collection standpoints:

1. Request Immediate Payment

Some types of businesses are very receptive to immediate payments. For example, the last decade or so has seen a gradual increase in the number of medical providers requesting immediate payment from patients without health insurance. Even those with insurance now have to make their co-pays at the time services are rendered.

If your industry is receptive to immediate payments, request them from your customers. Every customer who pays at the time service is rendered is one less customer you will have to worry about chasing down.

2. Establish Clear Terms

In cases where immediate payment is not appropriate, it is best to establish clear payment terms. Moreover, whatever payment terms you decide on should put the needs of your company first. If you need payment within 10 days to maintain sufficient cash flow, make 10 days your term. If you are good with 30 days, that’s fine.

The point of establishing clear terms is letting both your customers and your receivables team know where they stand. Clear terms define the rules by which you will either get paid or begin collection efforts. Without clear terms, you are giving customers the freedom to pay whenever they feel like it.

3. Send Reminders

You can make your terms more effective by sending routine reminders to your clients. Let’s say your terms are 10 days. Send payment reminders on the third, sixth, and ninth days. Weekly reminders are more appropriate for 30-day terms. And no, you do not have to spend money on paper invoices, envelopes, and stamps. You can send payment reminders via email.

4. Be Ready to Begin Collection

The success of the first three tips rests entirely on the customer’s willingness to pay. You have to be prepared that some customers will not pay. What does that mean? It means being ready to begin collection within a short time of determining default. Do not wait; the longer you do, the harder it will be to collect.

5. Use a Debt Collection Agency

Should you be forced to undergo collection proceedings, don’t try to do it alone. Use a general debt collection agency for any debts that do not involve a court judgment. Where court judgments are in play, hire a judgment collection service that specializes in this sort of thing.

The vast majority of judgments go forever unpaid largely because small businesses have neither the resources nor time to fully pursue them. They also lack the knowledge and tools to find debtors and make them pay. On the other hand, specialized judgment collection agencies are more likely to succeed.

It is not possible to avoid all bad debt. Bad debts are a part of doing business. But to the extent you can minimize them, your small business will enjoy greater financial health. That’s important, right?