How to Reduce the Risk of Writing off Unpaid Invoices
Whenever you extend to customers, you run the risk of incurring bad debts. Of course, you can take out business credit insurance to cover the cost of unpaid sales invoices, but credit insurance can cost as much as 0.25 cents for every dollar of sales. However, minimizing the risk of bad debts in the first place will cost you less.
Unfortunately, it is impossible to eliminate the risk of bad debt, and in many industries, you have no choice but to offer credit terms to customers. However, there are ways that you can reduce the chances that you will wind up writing off a sale as a bad debt. Here are ten tips to help your company avoid bad debts.
1. Have Clear Credit Terms
Customers must be aware of your credit terms when they place an order. So, your payment terms must be discussed with customers when they open an account, and those terms must be stated on invoices, statements, and on your website. And, if you charge late payment interest or offer early settlement discounts, this too must be clearly stated. If your terms are not made clear, you will find it difficult to enforce those terms.
2. Credit Check New Customers
Whether you are dealing with consumers or other businesses, credit checking new accounts is essential to avoid bad debts. So, run a credit check on new customers. And if you are trading with other businesses, it will also help to take up trade references. It is also best to set a low initial credit limit until the customer has proved their creditworthiness to you.
3. Send Invoices and Statements Promptly
Send invoices and customer statements as soon as they become due, and chase payment of invoices as soon as they become overdue. If a customer is experiencing financial difficulties, you want to ensure that your company’s invoices become a priority for payment. And, you can do that by being the creditor that gets in first with invoices and follow-up correspondence and calls.
4. Don’t Delay Putting Delinquent Accounts on Hold
Put customer accounts on hold as soon as it becomes clear there is a problem with payment, and consider reducing the credit limits of regular late payers. Both these steps will help to minimize the bad debt you may suffer. In addition, the smaller the amount you are owed, the more likely you will get paid.
5. Resolve Disputed Invoices Quickly
It is best to resolve any customer disputes as quickly as possible. If the customer claims that the product or service was not up to standard, for example, you won’t get paid until the dispute is resolved, and one disputed invoice may delay payment of the entire account. In some cases, it might be best to offer a partial refund to get the bulk of your invoice settled. So, negotiating a resolution that satisfies both parties is often the best way to avoid a disputed invoice becoming a bad debt.
6. Implement Robust Collection Tactics
It can be tricky taking a hard line on collections with a valued customer. However, it is best to try to be strict about adherence to credit terms from the outset. Indeed, if you give customers an inch, they will take a mile, and they will take advantage of your lapse credit control procedures. So, always chase late-paying customers as soon as their accounts become overdue. Follow up any action you threaten, like putting the customer’s account on hold or taking legal action.
7. Get to Know Customer Payment Cycles
Some businesses pay all their vendors at the end of the month, and some customers will always pay invoices the month after the date of the invoice. So, in some cases, you will need to fit in with your customer payment cycles, especially if that customer is a large enterprise. Even so, understanding when your customers usually pay will allow you to spot the signs of a potential problem and will enable you to act on it fast. You may also be able to adjust your invoicing and collection process to accommodate customers. For example, if you know when a payment run is likely, you can make a collection call around that time.
8. Modify Terms for Late Paying Customers
Customers do not have a right to credit accounts. Instead, credit terms are extended as part of the deal you make with customers. So, you could consider modifying your terms of sale for those customers that consistently pay late. For example, you might reduce a customer’s credit limit. Or you could start charging late fees. You could also reduce or withdraw any discount that the customer currently enjoys. The crucial thing is encouraging the customer to pay on time and reducing your potential exposure to bad debt.
9. Use Your Professional Advisors
No one wants to get heavy-handed over collecting debts. However, if your efforts to recover a debt have been unsuccessful, it would be best to refer the debt to a lawyer or collection agency. A letter from your business lawyer might be sufficient to obtain payment. If that fails, you may need to pass the debt to a collection agency. If an overdue account gets to this stage, your priority is damage limitation. You will be aiming to recover as much of the outstanding money as possible, which may not be the invoice’s face value.
10. Negotiate If Needed
You may find that a customer with a previously spotless record hits a cash flow problem and cannot settle their account. And, sometimes, in these circumstances, a negotiated settlement will get you more than insisting on immediate full repayment. In that case, you may need to make a judgment call and agree to a payment plan with the customer. However, if the debt is sizable, you must be sure you can trust the customer before you decide to extend any further credit, and you must come down hard if the revised payment terms are not met.
The Bottom Line
To sum up, avoiding bad debts comes down to not taking your eye off the ball. So, credit check all new customers and ensure that there are no doubts about your credit terms. Then, chase the late payers as soon as they become overdue, and refer delinquent accounts to your lawyer or a collection agency when it becomes necessary. And remember, no one has a right to credit; it is something you grant and can refuse or withdraw.
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Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.