No business can grow consistently without debts. They must borrow funds as the startups and initial companies share the limited capacity to invest funds and expand operations.  Aspects like business loans provide the company’s base to achieve small and long-term goals.

It helps cover up minor cash gaps without waiting for the capital to flow. Such instant access to cash helps secure new contracts and reduces long-term operational costs. Alternatively, companies must avoid bad debts.

What is a bad business debt?

A bad business debt occurs when a customer fails to pay what he owes to a company. The startup provides financial assistance to help the customer meet their requirements. However, the client can no longer pay the specific amount due on a certain date. This results in irrecoverable debt, also known as “bad debt.” It is charged against your account’s receivables.

Bad debts affect your financial projections, business goals and income statement. It freezes your cash flow and impacts growth. Less money affects a company’s capacity to pay the pending dues or liabilities. Eventually, the company defaults and enters the list of debtors. It may lead to insolvency and company closure.

7 Strategies to protect your business from bad company debts

No business likes to have bad debt especially if starting. You cannot stop yourself from relying upon loans and credit cards. However, you can limit the chances of slipping into bad debts. Here are some ways to minimise the possibilities of bad debt in business:

1)     Scan the customer’s financial profile

One of the best ways to prevent bad debt is to receive the payment before completing the project. You can set an advance payment structure that’s realistic and payable. Also, the previous payment patterns of the customers and bankruptcy status (if any) should be analysed. It will help you get the reassurance of getting your rest payment timely. 

This strategy prevents the customer from buying anything upfront and paying the dues later. Moreover, it secures the payment that you may get for the services rendered.

You can also provide them with the option of a payment plan. It requires one to pay at regular intervals until task completion. It could be the best option for customers with inconsistent income. It would also help them reduce the bad debt as much as possible.

2)     Consolidate existing business debt

Non-repayment from clients affects your cash flow. Thus, you resort to short- and long-term business loans to meet your needs. It helps you with aspects like- buying equipment or software immediately, updating inventory, paying the suppliers, or releasing pending payrolls. You must repay each loan according to the specific schedules.

Non-repayment leads to debt accumulation; increasing the interest and penalty costs. It further makes it challenging to repay the dues individually. However, you can pay it comfortably through a business debt consolidation loan in the UK marketplace.

Consolidation helps you merge different business debts into a single monthly payment. It thereby reduces your interest and monthly instalments. Eventually, you can clear all your debts with just a payment.

3)     Consider a bad debt insurance plan

A bad debt insurance plan, also known as credit insurance, acts as a safeguard against non-payment by clients. It protects your business against late client payments or non-payments. It provides financial security by covering outstanding debts if the client doesn’t pay. Precisely, you get what you offer on credit in any case.

 Either the customer or the insurance provider will cover the payments. It thus provides peace of mind and helps you run a business without worries. It prevents you from losing calm in business emergencies or uncertainties.

4)     Provide early payment discounts

Getting payment before the due date is better than getting nothing. Thus, think of creative ways to encourage customers to pay before the scheduled date. You can do this by offering an early payment discount. Individuals wishing to reduce the total amount they owe will willingly comply. This attractive incentive promotes timely payment and savings.

However, you must decide how much of a discount you should offer. It requires considering your debts, project requirements, time taken, etc. It must not hamper the value you provide to the customers with your services. Thus, don’t host whopping discounts. Keep it realistic to meet your liabilities and ensure customer satisfaction.

Additionally, you can host better discounts for customers with a large project size and amount. It helps you retain customers and maximise your profits indirectly. Analyse the due payment dates, late fees, and discount details clearly in the invoice. Don’t leave anything to the guessing part. It would help you get the money timely.

5)     Effort towards increasing the client base

Analyse the ways to distribute the impact of bad debt across large client sections. The more the customers, the better. When you default on a big payment, recovery becomes challenging. In most cases, you begin from scratch to re-track your finances and growth. Thus, it takes time to get debt-free and retain a reputable position in the market.

You can cut the hassle by limiting the impact of the bad debt. The high number of clients grants the security of paying the dues quickly. Approach the customers with sound financial standing first to discuss the payment timelines.  Provide a deadline and ensure they strictly meet the payment within that time frame.

6)     Provide more online payment options

It is all about encouraging timely payments from clients to avoid bad debt. One such way is to increase the online payment option. Most customers delay the payment due to online restrictions. Check which platforms the customers use the most for general payments. Include it as a part of your business transaction. Moreover, late payment fees should be set for responsible and timely payments.

Check for options like- PayPal, Stripe or Direct Debits. You can provide a little discount for the people opting for the direct debit option. It helps you get the payment timely even if the customer forgets the due date. Encouraging direct debits could be tough. However, listing benefits like credit improvement and avoiding debt may help them set one.

Setting the right one requires competitive research, experimentation, and initiation. It thus requires you to be on top of your finances. Check whether your current financial backup supports that. If not, contact expert business finance brokers for assistance. They may help you find the right loan, loan provider, and terms that fit your needs and financial potential.

It helps save time and money when finding the right one. You can get a loan to fund the initiative without any obstacles. You don’t need to worry about the documents required or loan approval. The person helps you with the loan approval process and gets cash quickly.

7)     Consider a debt collection lawyer

A debt collection lawyer helps you get efficient legal advice tailored to your specific needs. It will help you discuss your inhibitions regarding settling the debts. He may help you figure out the best way to proceed, considering your personal situation. The legal proceedings require you to attend court meetings. Alternatively, a dispute resolution may help if the debtor is ready to negotiate.

The professional advice will help you negotiate better terms with your clients. Entering a balanced figure that does not affect your effort and client’s finances is better. The legal expert may help define that without worries.

Bottom line

These are some valid strategies to protect your business from bad debt. It is all about encouraging your clients to pay the dues timely. You can provide payment discounts, analyse their affordability before providing services and take legal assistance. Things like these help you get the dues back. Alternatively, the client base can be increased to distribute the bad debt impact.