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6 Ways to Minimise Bad Debt in Your Business

View profile for Naomi Taylor
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No business likes to have bad debt, but it can be difficult to stop it from occurring, but there are some steps you can take to minimise it from happening in the first place.

In this blog post, we will discuss 6 ways to minimise bad debt in your business. From obtaining payment upfront to instructing a debt lawyer, these strategies will help your business stop bad debt before it starts.

1) Expect Payment Before Work Is Completed

When it comes to reducing bad debt in your business, one of the best ways to ensure payment is received is to expect payment before work is completed. By requiring payment before any work is started, you can ensure that customers have the funds available before any services or products are delivered. This is an effective way to minimise bad debt because it prevents customers from making a purchase and then not being able to pay for it later on.

A way to ask for payment before work is completed is to require a deposit before beginning any project. A deposit can help cover costs and materials associated with the project and will also show that the customer has the financial means to pay for the work. Once the project is finished, you can invoice them for the remainder of the project cost.

Another option is to offer a payment plan that requires payment at regular intervals prior to completion of the project. This can be a great option if customers may need more time to pay for the project and can also help reduce bad debt as payments are made throughout the process.

By expecting payment upfront or through a payment plan, you can be sure that customers have the funds to pay for their purchases and reduce the risk of bad debt. This method can be especially helpful for larger projects, where full payment upfront may be difficult for customers.

2) Get a Bank Guarantee

A bank guarantee is a promise from a bank to make a payment if the debtor does not fulfil their obligation. It is a form of financial assurance that can be used by businesses to protect themselves against the risk of non-payment.

To obtain a bank guarantee, you will need to provide the bank with evidence of your creditworthiness and the details of your contract with the debtor. The bank will then issue you a letter or document outlining the terms of the guarantee and any associated fees or costs.

One of the main risks of bank guarantees is that if the debtor fails to pay, you may be liable for any losses incurred by the bank in attempting to recoup the debt. Additionally, it is important to ensure that you fully understand the terms of the guarantee before signing any documents, as any miscommunications or misunderstandings may leave you financially exposed.

With that said, by using a bank guarantee, companies can protect themselves from bad debt as it acts as a form of security for payment should the debtor fail to fulfil their obligations. Additionally, it sends a clear message to the debtor that you are serious about obtaining payment and will take all necessary steps to ensure it is received. Furthermore, it may also encourage debtors to pay their debts more promptly, as they will be aware that you have the backing of a financial institution to pursue them for payment.

3) Use Credit Insurance

Credit insurance is a type of insurance that covers losses that businesses might incur due to non-payment or insolvency of their customers. This insurance policy pays for losses related to the non-payment of outstanding invoices, which can range from the full amount of an invoice to a percentage of it. It also covers losses from any legal costs associated with recovering a debt.

Credit insurance is usually provided by an insurance company, although some banks and other financial institutions may offer it as well. The provider will take into account factors such as the size of the business, its credit terms, the industries it operates in, and the creditworthiness of its customers when deciding whether to provide cover and at what rate.

The cost of credit insurance depends on the size of the business, the amount of coverage required, and the creditworthiness of customers. Generally, the higher the risk, the more expensive the premium. However, it is important to remember that credit insurance provides peace of mind and can save a business a lot of money in bad debt losses in the long run.

Having credit insurance in place can give businesses more confidence when extending credit terms to customers, as they know they are covered if a payment fails to materialise. 

4) Offer Discounts for Early Payment

Offering discounts for early payment can be a great way to encourage customers to pay their invoices on time. Not only will this improve your cash flow and reduce bad debt, but it can also give your business a competitive edge. By offering discounts for early payment, you’re rewarding customers for making payments quickly. This incentive is attractive for customers who want to save money, which will make them more likely to pay in full and on time.

You should consider how much of a discount to offer as well as how long customers have to take advantage of the offer. This can depend on how quickly you need the payment and the size of the invoice. For example, a 10% discount for payments made within 7 days can be a great way to motivate customers to pay on time. You may even want to make different offers for larger invoices or customers with good payment records.

In addition to offering discounts for early payment, you should also ensure that your payment terms are clearly stated on all invoices. This includes specifying when payment is due, any applicable late fees, and the details of any discounts offered. By being transparent with your payment terms, customers can be confident that they are getting the best deal possible and can plan accordingly.

Ultimately, offering discounts for early payment can be an effective way to minimise bad debt in your business while also increasing customer loyalty. Be sure to weigh the pros and cons carefully when deciding on the terms of your offer to ensure it’s a win-win situation for both you and your customers.

5) Set Up a Factoring Facility

A factoring facility is a way for companies to reduce bad debt by obtaining payment in advance. Factoring involves selling a company’s receivables, or invoices, to a third-party company, known as a “factor”. The factor then pays the company an agreed amount up front and takes on the responsibility of collecting payments from customers. This way, the company is able to receive payment upfront and minimise any potential losses due to bad debt.

Factoring can be a great option for companies that need quick cash flow and have difficulty collecting payments from customers. By using a factoring facility, companies can avoid having to wait for payment from customers and reduce their exposure to bad debt. Additionally, the factor typically charges lower fees than traditional loan providers, making it an attractive financing option for businesses.

If you are considering setting up a factoring facility for your business, it is important to research factors carefully to ensure that you find one that is reputable and offers competitive terms. A good place to start is to look for factoring companies in your area that specialise in providing financing solutions to small businesses. Additionally, you can ask other business owners for recommendations and reviews of their experiences with different factoring services. It is also important to be aware of the fees associated with the services provided by the factor and make sure they are within your budget before signing any contracts.

Overall, setting up a factoring facility can be a great way to reduce bad debt and obtain payments upfront. If you do your research and choose the right provider, you can enjoy the benefits of having quick cash flow without having to wait for payments from customers.

6) Hire a Debt Collection Lawyer

Having an expert debt collection lawyer on your side can provide thorough and efficient legal advice tailored to the specific needs of your business. When you hire a debt collection lawyer, you can speak to a human to address any of your concerns or queries.

The legal process usually starts with pre-action correspondence, which is followed by issuing court proceedings. However, alternative dispute resolution may be preferable if the debtor is willing to enter into negotiations. Your lawyer will explain the whole process.

By getting assistance from a professional debt lawyer, you can avoid the stress of recovering debt and you may even be able to secure a fixed fee for their work. At Biscoes, we are experts in recovering debts, no matter how big or small they are. Get in touch with us today at 02932 660261 to find out how we can help you get the money you're owed.