How To Minimize Bad Debt For Small Business

How To Minimize Bad Debt For Small Business

As a small business owner, I am sure that you understand the importance of managing your cash flow, but are you doing your best when it comes to managing your overdue accounts receivable? Unfortunately, many small business owners are not. They are great in their field of expertise, yet are lost when they have a customer who is not paying their invoice. This can lead to catastrophic cash flow issues if the account is not addressed. There are two places that you can institute policies around to help minimize your risk of overdue accounts receivable before you extend credit to your customer and after the overdue account is accrued.

The easiest way to minimize overdue accounts receivable is to head them off before they even happen. You can do this quite effectively by having a detailed credit application, I’m so much of a proponent of this that I wrote a whole blog dedicated to creating one. A detailed credit application does two things, it informs your customer of the terms and conditions of the credit you extend. Secondly, it gathers valuable information from your customer that can then be used to recoup the overdue account if your customer defaults on payment. If you don’t already have a detailed credit application this is where you should focus your efforts.

Credit applications can provide a really great snapshot of your customers, but they don’t give the whole picture. By having your customer agree to a credit check you can bring that picture more in focus. By agreeing to a credit check your customer will authorize you to approach TransUnion and Equifax (the two major credit reporting agencies) and receive information on your customer’s credit history before you extend them credit. This will help you make an informed decision as to whether or not you want to extend credit to that particular customer and heads off any potential issues early in the credit process before they can become a problem later on.

The second part of minimizing overdue accounts has to do with the policies you have in place to deal with the account after it has become overdue. It’s a bit more challenging than dealing with an account before it is overdue, but these practices are none the less effective. By conducting regular follow-ups and talking to your customer you can get those overdue accounts paid even after you think it is too late.

I’ve seen it so many times in my career, companies sending invoice after invoice, after invoice to their customer in the hopes that it will get paid. FULL STOP it doesn’t work and if you are doing this you’re wasting postage. If you want that overdue account paid you to need a policy in place that emphasizes telephone follow-ups with your customer. As an employee of a credit management company I can tell you we put great value on phone calls especially when you can speak to the customer, in fact, we believe verbal contact is THE BEST way to recover an overdue account and actively track them. The reason we value it is that speaking to someone directly and in real-time is when you can get a feel for your customers.

Speaking with your customer on the phone allows you to better understand why they haven’t paid their account or invoice. They may have received every single notice and invoice you have sent, but haven’t paid for any number of reasons. Until you talk to that person you have no way of finding out why. The one thing to remember is to always be professional on a collection call, listen to your customer, discuss repayment options, and proceed from there. Being aggressive or overreacting to what your customer has to say can actually decrease your chances of getting paid as it will steal the resolve of your customer, especially if they dispute the account. You need to work together to resolve the situation.

All small businesses want to reduce their risk of overdue accounts receivable. The best way to do this is to have a credit process that dictates what to do before extending credit and after an account becomes overdue. Preparing yourself and your customer beforehand with credit applications and checks, then following up via phone after the account is overdue are sure-fire ways to minimize your overdue accounts receivable when extending credit.