Measures to Prevent Bad Debts Effectively

  • Taking measures to prevent bad debt is a better option than trying to extract the debt from insolvent debtors. While it is impossible for any business to judge and foresee the upcoming insolvency when offering credit to a client, there are some measures that one can take to minimise the risk of bad debt.


    Many businesses have also started hiring a credit management agency to help them prevent potential losses due to bad debts. Some measures that you can take to ensure proper credit management is: (Information credit: Accountability)


    1. Credit Reports - The first thing is to obtain a credit report and get an insight into the financial position of the company. However, only knowing the current financial position of the company is not enough. You should also assess the trends of the company by checking a few accounts from previous years.


    2. Guarantee - In case you wish to trade with a company that does not have a very strong financial position, you should make attempts to strengthen your position to ensure recovery and diminish the risk of insolvency. For this purpose, you can ask the directors of the company to sign a director’s guarantee or if the company has a strong holding company, you can request a cross-company guarantee.


    3. Insurance - Credit insurance is another good option to secure your company and provide the option of trading without any risk. While this is not a very sought-after method as the premiums can be expensive, it turns out to be very effective in the case of necessity. When you have your credit insured, you can be sure that you will not lose it all.


    4. Credit Policy - The credit policy of a company is perhaps the most important instrument ensuring efficient credit management. The credit policy should be known to all, from the sales staff to the managers and the directors. The policy must be drafted in agreement of the Operations Manager, the Credit Manager and the Board of Directors. It will guide the sales team through their deals and strengthen the relationships between the operations and the credit departments.


    5. Debt Collection - No business can operate without cash, meaning that the cash collection department is like the bloodline of the business. The collection team must be efficient in following up with the clients for their payments. Ensure that the collection team keeps checking upon the clients before their invoice is due. This will ensure that you get notified of any issues in payments from the client’s side. Time-to-time calling will also build a good rapport with the clients, making you rank higher in their payments list.


    Your credit management team must be aware of all the legislation that surrounds the collection process. If you do not have the time or skills needed to manage credit, you are more than likely to suffer losses arising from bad debts. In such a scenario, it is a good option to outsource your debt management and collection to a credit management agency.