The last year was an interesting year for businesses in America. There was a lot of talk about the trade agreements with China and how they’d affect businesses moving forward. By August, experts were predicting doom and gloom and speaking of a looming recession.
Fortunately, according to the Washington Post, the outlook has improved significantly since then. Through securing several trade deals, the government improved the forecast in terms of trade deals. The Federal Reserve boosted the economy further by lowering interest rates.
You’re probably wondering, “What does all that have to do with our debtors?” It’s quite simple – America came within an inch of a recession. Economists agree that we’re entering into the end of the current growth cycle.
That, in turn, means that the recession will come. It may not be this year, but the threat is always out there. Savvy business owners will start taking steps to recession-proof their businesses. One of the best ways to do this is to start reducing bad debt.
Why Tackle Bad Debt?
Cutting costs is usually the go-to move when times are tough. This approach is only useful up to a point. After all, if you’ve been running a lean business, there’s only so many reductions that you can make.
Bad debt is a far more serious problem. Clients have used your resources, whether that’s products or services, and aren’t paying for them. You’re not even recovering the base cost for your product or time. It’s a losing situation.
When times are tough, bad debt rises. This could be the killing blow for a company struggling with a depressed market. We’ve seen it before.
Since 2000, the average American’s credit card debt has increased by 52%. Consumers have clearly become more comfortable with using debt. They’re more likely to apply for goods on credit than they might have been 50 years ago.
That’s why the first step to recession-proofing your business is to be more careful about handing out credit. You need to start reigning in your slow payers now to get your bad debt under control. In this post, we’ll look at ways to reduce your bad debt in 2020.
How to Start Tackling Your Bad Debt
Tighten Up Your Credit Processes Initially
It’s important to have a clear credit process in place. Get a professional to help you draw up a clear and unambiguous contract template. Clients must know exactly what is expected and what actions you’ll take if the conditions aren’t met.
During the initial application process, find out what the client’s internal processes are. Does the invoice need to be sent for approval first? Do they normally pay invoices upon receipt, or do they have a monthly pay run? You may need to accommodate their payment processes too.
Whatever the case, make sure that everyone understands what’s expected of them.
With regards to credit applications, make a point of vetting them thoroughly. Phone the consumer’s trade references and see if they’re good payers. Run credit checks on the business. Consider including a clause in the application to allow you to check the owner’s personal credit as well.
Chase Up Late Payments Immediately
If your client is late with a payment, address it immediately. This is particularly important with new clients. If you’re too lenient in this area, they’ll get into the habit of paying late. Remember, it suits the client’s cash flow better if they’ve got more breathing room.
The faster you follow up, the faster you’re likely to get paid. Start by contacting the person who placed the order in the first place. Keep the conversation light and diplomatic. Find out if there’s a reason that the invoice wasn’t paid.
Naturally, there’ll be some clients that don’t respond to gentle prodding.
Enforce Payment Rules
If your client consistently pays late, you’ll need to get stricter. This could mean not allowing them to buy if they’re in arrears, or dropping their credit limits. You might exclude them from bulk discount offers too. Your sales team will probably hate you for getting stricter, but it must be done.
Formulate a strategy that you’ll employ with bad debtors. Follow through with your strategy. If the client has a valid reason for being late but usually pays on time, that’s a different matter. With undisciplined clients who consistently pay late, the only answer is to enforce the rules.
If all reasonable attempts have failed, it might be time to consider legal action. This should be the method of last resort because it’s an expensive route to go. It can be avoided if you train your clients to pay on time every time.