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3 mins read

What Causes Bad Debt?

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When it comes to any business-to-business relationship, maintaining a mutually respectful and reliable partnership is one of the top priorities. But what happens when your customer ends up being unable to deliver on their promises?

Chances are these customers mean bad news – and bad debt!

What is bad debt?

Bad debt happens when your customers are unable to reciprocate or repay an amount owed in the set amount of time. Any amount, or receivable, that is lost, written off and unable to be recovered is essentially bad debt.

There are a number of reasons why your customers might fall into bad debt. Sometimes they’re genuinely unable to pay back a loan due to bankruptcy or poor financial management. In turn, your clients might also be experiencing delays in payments themselves or the market they work with has been impacted by external factors.

Your customer might have had their credit line withdrawn by their bank and have less capital to work with. Then there are those customers who refuse to pay you back and had no intention to do so in the first place. These are the customers who engage in dealings such as fraud and deliberately misrepresent themselves to obtain a credit sale.

But regardless of how the bad debt occurred or how inevitable it is, accumulating too much is extremely damaging to any business. Hence, it is imperative to keep bad debt manageable proactively and to not let it blow out.

How to prevent bad debt

While bad debt is always a risk when lending credit to customers, the potential for its harm can be mitigated through having robust credit management policies and credit monitoring tools.

Ensure the customers you work with have good credit behaviour by giving them a thorough credit history check and performing routine credit reports. Likewise, through regularly monitoring your customers, you’ll be able to see any important changes to their accumulated debt and credit score rating sooner rather than later. Take extra diligence in performing credit checks on customers who are looking for bigger contracts and riskier transactions, such as forward rate agreements (FRA).

You can also further reduce your business’s proximity to future bad debt by employing tools that help you understand your customers’ financial habits and predict their payment behaviour. Incorporating tools like CreditorWatch’s PaymentPredictor, which helps you address failing payment behaviour, and DebtorLogic, which helps you uncover your high-risk debtors and prioritise your debt collections, as a creditor are instrumental in ensuring you keep as much bad debt off your hands as possible.

By incorporating all these methods, as well as implementing a suitable credit policy and transparent payment terms, you’ll be able to work with more customers, you won’t have to chase non-payment and you will improve the health of your balance sheet.

How to deal with bad debt

Sometimes, there are customers who slip through the cracks and leave your business with a string of unpaid debts. But with the right debt collection tools and management strategies, you can encourage even your slowest debtors to pay you on time.

Build a professional rapport with your customers and clearly communicate your trading terms with them by providing them with a variety of letters for every stage of the debt collections process. CreditorWatch-branded letter of demand templates increase your chances of collecting outstanding payments by up to 53 per cent.

For an even more powerful way of encouraging your customers to pay you faster, our unique payment defaults let slow and non-paying customers know that you take debt seriously by lodging this against them. Registering a payment default remains on a customer’s credit report for up to five years, warning other businesses about their poor payment behaviour.

To help you get paid on time and keep bad debt off your books for good, CreditorWatch is here to provide you with the services you need. Sign up today for a 14-day free trial.

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