Collecting on a Bad Business Debt

Written By Ellise Walsh

Fri 3/18/2005 11:26 AM

One of the worst nightmares every business owner faces is the reality of having to collect on a bad business debt. We all take payment in good faith, believing the customer has the best of intentions but the truth is that there are some customers our there just waiting to scam an unsuspecting business and get a product or service for free.

Research has shown that business debt causes more companies to go under than any other problem. Not only are you out the product or service but you have also lost the revenue that was supposed to have replaced it. In addition, now you’re facing more money in efforts to try and recover the debt. If you have too many business debts or even just one expensive debt, the business you have worked so hard to build can begin to crash around you in no time.

Trying to recoup a business debt can sometimes result in your business losing more money than the original debt was worth. There are litigation fees to consider, payments made to debt recovery agencies as well as the time you lose in recoupment efforts. It would be much easier and cost-effective if you could just avoid bad business debt all together. While that may not be completely possible, there are a few things you can do to reduce the risk of incurring a bad business debt. Take a look at the following tips:

Tip #1 Speak up for yourself and ask for your money. If your business is on a system where you provide invoicing instead of payment upfront, get organized and make sure you know when you’re money is due. When that day comes and you still haven’t received payment, don’t delay in contacting the customer to politely remind them they still owe you money. Be firm, but polite.

Tip #2 Protect yourself by making sure you have a payment policy in place. Attach a copy of the policy to every contract. Have the customer sign it and keep a copy on record. Hopefully you will never have to use it, but if you do; it can be very beneficial if you are forced to seek legal remedies in order to collect.

Tip #3 Don’t wait until a situation is critical to find out what your options are in regards to collecting on a bad business debt. Become familiar with the costs related to collecting on a debt and then place this information in your payment policy. Inform your customers what you expect and that you will seek all remedies available to you in order to collect funds due you. While this won’t stop all customers who fail to pay, it will prevent some from trying to take your product or service without anything in exchange.

Tip #4 If your business deals in expensive contracts and the loss of revenue on one contract could place your company in jeopardy of folding, give serious consideration to running a credit check on your customers. Yes, there is a charge related and yes you must obtain permission from your customer before you can run a credit check on them. Look at it this way, however. The fee you pay to run a credit check is much less than the revenue you are at risk to lose in a bad business debt. Consider it an investment. Secondly, customers who pay their bills promptly and have no intention of scamming you have nothing to worry about.

Tip #5 While it may seem obvious, make sure you collect good contact information on your customers. Don’t allow them to write you a suspicious looking cheque that has no way of contacting them if you find you can’t collect. Sadly, too many people make a living from writing bad cheques and floating from town to town. In these types of situations, there is often very little you can do to collect on the debt. It is far better to make an effort to avoid the situation completely.

Tip #6 Be persistent about collecting on any bad business debts owed to you. Remember, you are not the bad guy in this situation and you should not feel guilty about pursing every avenue available to you. Failing to make good on a bad business debt is the equivalent to theft. Make the world a better place. Help to rid it of customers who steal through the veil of bad business debts.