Businesses with money owed to them often find themselves at the back of the queue when it comes to getting paid. If a company goes into administration then typically, its first payments will go to the insolvency practitioner, followed by repayments to bank loans and payments for employees.
At this stage, creditors can be in for a long wait and months of frustration.
Jan Firth, of Firth Law, specialising in debt collection and enforcement, has this to say about bad debt, “You can avoid a situation of a business going into administration when it owes you money, but this requires that you’re aware of the warning signs in advance.”
What is a company’s performance like when it comes to making payments? This should be a good indicator of the general state of its health, and of its attitude to paying invoices on time.
“Your customer might start out being reliable but then begins to lag behind with payments,” Jan observes. “If this starts to happen you need to try and find out why.”
This requires a degree of research – asking contacts, running a credit check report, or even checking for stories about your customer in the media.
“When payment performance deteriorates, you need to heed it as a possible warning sign”
Persistently Late Payments
In some cases, it is not about performance deteriorating but that it is poor from the start. If a customer’s payments are late every time then it should make you wary.
“Unfortunately, some businesses are simply cynical late-payers, wanting to keep money in their accounts for longer,” Jan says. “But others are encountering financial difficulties, which means that regular late payments are another warning sign.”
Jan points out that businesses should have clear terms and conditions for a very good reason, “The longer the time that invoices go unpaid beyond your terms and conditions, the greater the risk is of you encountering bad debt,” she advises.
People who do not pay will come up with a variety of excuses for not doing so. These include the more obvious “the cheque is in the mail” or “it’s being processed” to more elaborate excuses such as bereavement or illness, or a computer system that keeps crashing at key moments.
“Lots of excuses for late payment usually means trouble, and if one of them is that they are waiting themselves to be paid then this is unjustifiable – you don’t have a pay when paid contract”
Jan also mentions other potential indicators of bad debt, such as customers losing major contracts, or other news about problems they are experiencing.
“Proceed with caution,” Jan concludes. “Research your customers, run credit checks with services which will update you automatically if anything changes. You can’t eliminate bad debt, but you can avoid it.”