What you should do if a good customer incurs bad debt

The most common reason that business relationships turn sour is generally due to bad debt. No one who runs a business wears rose-tinted glasses about debt, believing that it will never happen to them, however, when an existing customer with a good history starts getting behind in payments, it is a difficult situation.

It leaves you with a bit of a challenge. On the one hand, you have a customer of good standing who has always paid on time and have a very sound relationship. But on the other hand, you have to consider the impact on your cash flow and how this could affect other areas of your business. So how do you handle this?

The answer is to understand what is happening and why they haven’t made a payment. There is the potential that the customer may bring you more business in the future, so understanding the situation and plan accordingly to safeguard the relationship should be a priority.

First, it’s important to ensure the payment is ready to be classed as a bad debt. You should only begin to consider the non-payment as an issue after one full payment schedule has passed or you are aware of a specific circumstance. There are your credit terms to consider, but also the payment pattern of your customer. For example, you may invoice on a monthly basis, but your customer normally pays on the 15^th of the following month. They should be allowed a few days grace, however, it’s important to know how to proceed based on their unique situation. Try not to leave it to your credit control process, and instead treat good customers on more of a personal level and get to understand the situation completely and try to find a solution that helps both parties.

Understand the situation

Finding out the reason why the customer has not settled their invoice(s) will be the basis of how you will deal with the situation. There could be any number of factors why their invoice hasn’t been paid. Every business is at the risk of short-term cash flow problems, payment processing issues, financial downturns, credit problems, operational issues, or and even natural disasters. Make sure you talk with your customer to ascertain the reason behind the slow payments.

Find a Solution

If the issue is just a temporary cash-flow problem, come to an agreement of when the debt will be settled. But its imperative to define how long “temporary” means. It might not make much sense to continue business with someone who is going to struggle their future financial obligations. Bad debt will simply mount up and you could be faced having to write off bad debt – which is something that you want to obviously avoid. If you don’t want to lose a good customer who is currently experiencing financial issues, try finding a way to continue doing business. This could be making smaller orders more frequently, paying a deposit, or perhaps a payment schedule to help them stay operational.

If the problem is due to the billing cycle or your agreed payment terms, these too can be updated to manage short-term cash flow issues. Make sure you still consider the demands of your own cash flow, however, there are various ways to make it easier for your invoices to be paid on time. For example:

• If your customer has to pay all their bills at the same time, agree to a different payment schedule that puts you ahead of other creditors in the payment cycle.
• Avoid future payment issues by invoicing at a time other than the end of the month. Many companies have a monthly billing cycle which puts pressure on every other business to pay all their creditors at the same time. Sending your bill out at a different time of the month reduces the pressure on your customer’s cash flow, thereby reducing the risk of your invoice not being settled.

Make sure you have a robust credit control process and keep your accounts receivable team informed of any agreement and or changes you have made with the customer. Identify any future non-payment quickly and follow it up as soon as possible. A gentle follow-up call to enquire about their new situation could be all it takes to get your invoices to settle quickly.

Struggling to get paid?

If you have been unsuccessful in achieving a resolution and haven’t agreed a way forward, or the customer has defaulted multiple times, this should be seen as something more serious and you probably need to think about the viability of the relationship and long-term impacts on your business.

At this point, you may need to look at your options at getting your debts settled. You can try and collect the debt yourself by continuing to send reminder invoices, letters of default and so on, but for a certain level of debt, it is more effective to use a professional debt collection company.  They have the time, experience, know-how, and technology to get you paid faster. Especially if legal recourse is needed to get the debt paid, they understand the entire debt collection process including the specific laws and regulations specific to your state or territory.

Depending on the amount of debt you are owed, you need to look at the financial benefits of outsourcing your debt recovery versus simply writing off the debt. Generally, if the debt amount is relatively small, hiring a professional debt recovery agency might not make sense – so it’s important to conduct your due diligence before engaging a third-party.