Dealing with bad debts

On average small and medium sized businesses write off £14,000 in bad debts each year, according to the Credit Management Research Centre. If they have a 5% profit margin that means they need additional sales of £280,000 just to make up for this loss.

Think about how a bad debt could impact on your business. How much extra turnover would you need to cover this loss? And would your businesses be able to survive?

Prevention is best

• Know your customer – a simple check with Companies House can confirm they are who they say they are and enable you to check their accounts.
• Check they are a good risk – by checking with a credit reference agency, by asking for bank and trade references and by searching the Registry of County Court Judgments to reveal if those running the business are in financial difficulties.
• Set clear credit limits for every customer – to limit potential losses.
• Consider credit insurance – it will cover the debts owed to you.

Watch out for warning signs

• Mistakes on cheques – they forget to sign, words or figures differ, or cheques are wrongly dated. These may be genuine errors or may be a means of buying extra time.
• Constant queries – about the product or service or about the invoice. Again these could be delay tactics.
• Excuses – like the cheque is in the post.
• Rumours – staff often pick up on these first.
• Trading at their credit limit – if a customer is continually trading up to the limit or asking to exceed it, it should ring alarm bells. However, it may be that they are buying more from you and so need an increased limit.

When faced with a late payment that could become a potential bad debt

• If it’s won’t pay, is it worth the fight? If you are going to get nothing back, don’t waste your time or money.
• If there is a chance they will pay, consider court action – but send a solicitor’s letter first. In around half of cases this works. You can use an online service to send a solicitor’s letter ‘before action’ for as little as £5.If that does not do the trick then you can start proceedings. For debts over £750, you can issue a statutory demand. Alternatively try the Small Claims Track (for debts up to £5,000) or the fast-track procedure in the County Court (for claims up to £15,000). The Small Claims limit in Scotland is £3,000.

For more information go to Business Debtline at www.bdl.org.uk or call 0800 197 6026.

If the worst happens: talk to your bank if you need additional funding and tell HMRC – you may be able to reclaim the VAT on bad debts.

The other side of the coin

Cashflow does not just involve getting money into the business. The other side of the coin is paying money out.When the economy takes a downturn suppliers may want to protect their financial position by:

• Reducing the amount of trade credit they will advance you
• Asking for payment more quickly
• Asking for stage payments or even cash on delivery
• To ensure that you are not being squeezed on both sides you need to manage this side of the cashflow equation and remain a low risk for your suppliers.
• Make sure you know when you are expected to pay – not all suppliers have clear terms and conditions.
• Pay on time – and if you can’t do so, contact your suppliers to explain why.
Protect your credit rating – don’t wait until the start of court proceedings to pay.
• Once your credit rating is damaged, you may find it hard to get any credit at all.
• Try to negotiate longer payment terms if you are finding your customers are taking longer to pay you – if not, see if you can get a discount for prompt payment.


[Extract from Trading Through The Economic Downturn - published by NatWest - full Guide available by clicking here]

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