1. Perform a thorough background credit check
More than 80% of small business owners’ have experienced cash flow problems in the past 12 months, according to an online survey. The survey highlights that only 17% of businesses conduct credit checks on new customers.
The report also shows that a key contributing factor to business owners’ cash flow woes is the length of time small businesses wait to be paid. Before you agree to do business with a new client you have the option to perform a thorough background credit check. Credit checks allow you to reduce the risk of bad debt by making an informed decision on whether a client or business has a good credit history.
Credit checks also allow you to reduce your application processing costs, establish the correct legal identity, source basic credit information and lower the risk of acquiring debt collection and recovery costs in the future.
2. Ensure your Terms of Trade are legally enforceable.
Terms and Conditions of trade are vital for any business that provides credit or enters into a business transaction.
When dealing with clients that have overdue accounts it’s crucial for businesses of all sizes to have a clear Terms of Trade agreement in place. The terms and conditions of trade clarify responsibilities and expectations in order to conduct business together and will help assist your business to maintain a healthy cash flow.
If you do not set the terms in which your business trades you, will potentially be stuck with the terms set by the person you are doing business with. It most cases it’s unlikely to be in your best interest if your engagement operates on the debtor’s terms.
Your terms set out the basis of your contract with your customers, and enable you to defeat spurious claims by a reluctant debtor. By having proper terms and conditions in place you will reduce the cost of monitoring payments, resolving disputes and most importantly reduce the number of overdue accounts and bad debts.
Your terms of trade must be sent to your client before the transaction has occurred in the quote for example. Those terms should be approved and signed by your customer in order for the terms to be enforceable should you need to collect money in the future.
3. Review your outstanding receivables on a regular basis
The biggest mistake that small business owners often make is waiting too long to follow up with clients that have outstanding debt. It’s critical for businesses to regularly review their outstanding receivables in order to quickly identify missed payments.
Research has shown that the probability of collection on delinquent accounts drops dramatically each month after the original due date. For example two months after the due date owners have an 81 percent chance of recovery which goes down to 52 percent after 6 months.
If a client invoice is outstanding for as long as 12 months the chance of recovery drops to less than 25 percent. These statistics evidently show that its critical businesses are proactive and react quickly to recovery of bad debt.
4. Keep regular contact with your customers
If a payment date has been missed it’s important that you firstly contact your client and understand exactly why this has occurred. In many cases this may simply be an error by staff or that the invoice has been missed through busy periods or heavy workload.
Before concluding the call between you and your client, it’s very important that clear expectations are set and agreed in regards to the outstanding amount. It’s reasonable to summarise the revised arrangement and request the client signs off to ensure both parties have agreed and understood their expectations.
If the new date arrives or the arrangement is once again broken then you may have reason to believe the customer is untrustworthy and to seek assistance from a debt collection agency.
5. Engage a debt collection agency
Attempting to recovery outstanding debt can be both stressful and worrying for business owners. If you’ve tried all of your previous steps then you may wish to hire specialised help such as an experience debt collection agency.
Hiring a debt collection agency can reduce your stress and allow a third party to act on your behalf in order to recover overdue debt. Debt collectors typically work on a fee based system where a percentage of the outstanding funds will be charged in return for the collection and recovery of your money.
The experience of your debt collector can provide you with greater chance of recovering your debt. Debt collectors acting on your behalf should maintain a polite, professional and confident approach and treat your clients and business the same respect that they treat theirs.