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10 ways to … avoid bad debts

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  • Publish date: 02 October 2012
  • Archived on: 02 October 2013

Most businesses will have experience of customers who - for one reason or another - refuse to pay up or who pay their bills long after they are due. Here are our top tips for reducing the risks of bad debts.

Small Business Update

This update was published in Small Business Update 106 - October 2012

Small Business Update from Atom Content Marketing is a monthly magazine for people running their own business. Articles vary in length and cover 'hot topics', issues of importance, and current affairs.

  1. Assess customers’ creditworthiness and set appropriate credit limits. You can ask new customers for trade references or pay for an online credit check. Consider setting a lower credit limit for new customers until you are confident that they can and will pay you on time.
  2. Draw up clear terms and conditions (using your professional advisers if necessary). Make customers aware of them and get customers to agree to your terms of trade. Publicise your terms on your website and send a copy with your goods and invoices. Include a clause stating that you continue to own goods until they have been paid for, and requiring customers to draw your attention to any delivery problems promptly. Remind customers that you have a statutory right to charge interest on late payments (even if you do not plan to enforce this right).
  3. Check where and to whom you should send your invoices; you may need to send it to the buyer for approval before it will be paid or direct to the company’s accounts department.
  4. Send your invoices promptly and start chasing payments as soon as they become due. Actively chasing overdue debts is a vital part of minimising late payments. The sooner you do this the sooner it should be paid.
  5. Find out if your customer has a regular payment system (eg a monthly cheque run). Consider adjusting your system to fit in with this: for example, following up as soon as you realise your payment has been missed out – or calling in advance to ensure that a cheque will be issued.
  6. Phone your contact when an invoice becomes overdue (eg the individual who placed the order) and ask them to help, as routine letters tend to be ignored. A diplomatic approach generally works best, particularly when you want to have a continuing relationship with the customer.
  7. Resolve any disputes quickly (eg if the customer claims the goods were faulty). You are unlikely to be paid until this is done.
  8. Reconsider the terms on which you do business with customers that regularly pay late: for example, increasing the prices you charge them or cancelling their credit facility.
  9. Formulate a strategy in case your debtor continues to delay payment. You might have to write off small debts that are not cost effective to chase. You could also consider putting the customer’s credit facility on hold preventing any further credit sales until the account is cleared. An alternative is to negotiate part-payments or to use an arbitration or mediation service. This can often help to resolve disputes without the expense of going to court.
  10. Involve your professional advisers if your attempts to recover the debt are unsuccessful. Your solicitor can chase the debt for you or recommend a debt collection agency. A solicitor’s letter may be enough to prompt payment without any further action. Small claims (for up to £5,000) can be dealt with relatively quickly and inexpensively using the small claims track.

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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