How to Spot a Bad Debt Before it Happens
Warning Signs
You absolutely must try to avoid businesses going into administration while they owe you money. The process of administration is lengthy and you’re almost always at the back of the queue to get paid. Once the insolvency practitioner has taken their fee, bank loans have been repaid and staff paid, there's little or nothing left. You may have to wait years only to receive pennies in the pound.
With this in mind, it's well worth keeping a close eye on your customers to see if you can spot any early signs of financial distress and act quickly to avoid getting caught. This should start before you even offer credit to a customer - get a credit report on them to see how much credit you should be giving, if any!
Payments are Late Every Time
If a customer always pays late, it’s hard to know whether this is a sign that they’re in financial difficulty or whether it’s just a cynical financial policy to ’sweat the balance sheet’. In either case, it’s still good practice to strive to get the company to pay on time. The longer your invoices are beyond terms the more chance you have of being caught by a bad debt.
"I'm Waiting for a Customer to Pay Me"
This is a very common excuse, especially when you supply products or services that the customer then invoices someone else for. In their mind, they can’t pay you until their own customer has paid them. But if this really is the case then it is a significant warning sign that they are financially stretched, perhaps because they have taken on a too-large contract or have general cash flow issues.
You should remind the customer that you don’t have a ‘pay when paid’ contract and act quickly to show them that you are taking the issue seriously.
"I can't Afford to Pay"
Warning lights should be flashing and klaxons sounding if you hear this from a customer. They are obviously holding off creditors left and right and you need to escalate the situation quickly to make sure that when they have some money to pay, you’re at the top of the pile of urgent invoices.
Payment Performance Deteriorates
You get to know your customers. You know which ones pay on time every time, and if a pattern of late payment suddenly emerges for a business that previously paid quickly, it’s time to do your research. Try asking your contacts at the business if something is up. Look for news articles about the company (if it’s large enough to figure in the media) and run a credit check report on the business to see if there’s anything going on.
Mail is Returned
A letter returned in the post is a sign that things might have gone badly wrong at the company that owes you money, although it could just be that they’ve moved offices without a forwarding service. Check their website to see, or search the company at the London Gazette to look for a change of registered address or winding up petition.
Most of us invoice by email now, and often these services will continue to run automatically even after a company has switched off the lights and locked the doors. A returned mail with a ‘mailbox full’ message is a bad sign, although it could just mean that the person has left the company or gone on a long holiday. A returned message saying ‘nonexistent domain’ is also a bad sign as it could mean that the company has failed to pay web hosting fees to their service provider and been cut off.
Excuses, Excuses
The creativity of debtors in finding excuses to explain why they didn’t pay / can’t pay their overdue debts never fails to surprise us (see our article on excuses and how to deal with them). Clearly if the excuses just keep coming for a past-due invoice it’s time to escalate the process of collection.
Adverse News or Loss of a Major Customer
If you hear on the industry grapevine that a customer has lost one of their major contracts, or had some other major blow it's time to start paying close attention to their invoices until you’re confident that their payment practices are unaffected.
Regular Credit Reports
Remember that a credit report is only a ‘snapshot’ at one moment, and based on the information available at the time. Things change and it's good practice to continue to check up on your customers on a regular basis, for example annually - even if you haven't seen any of the warning signs.
How we can Help:
Outsourced Credit Control Service
