Every business has challenges with bad debt. From bounced customer checks to late payments, or no payments all, being able to avoid or reduce bad business debt is crucial to the financial health of a company. Bad business debt is often the result of doing business with customers who are dealing with their own financial struggles. Managing the relationship with these customers distracts owners from more important work.
Companies offering payments terms to their customers are most susceptible to late or missing payments. One of the most significant sources of stress for business owners is worrying about if or when a customer will pay their invoice. Here are some tips business leaders can use to eliminate the worrying and reduce bad debt.
Knowing a customer’s credit and payment history is valuable information when deciding if you are going to provide services, work, or sell to them. This information is available by subscription from any of the major credit bureaus. Reviewing the credit history of a customer gives insight into their payment trends and any issues they might have. If a potential or existing customer shows signs of payment problems, turn to a different customer, or change your terms. A subscription to a credit bureau is expensive but can pay for itself in the long run.
Not all companies have enough customers to justify a credit bureau subscription. If that’s the case, another good way to reduce risk is to check your customer’s references. This should be done on all new customers before any work begins. Get references on all new customers and keep them filed for future reference.
It’s an excellent practice to check references on your existing customers as well. You may find things might have changed since you last checked. When a company is having payment issues, it’s not unusual for them to pay one or more vendors in terms, and string out the rest. Talking to references of established customers can give insight on any difference in payment trends.
Some companies get comfortable with certain customers and over time, devote more and more resources to serving that customer. Concentrating work with one or two customers that are creditworthy and have good payment trends, has drawbacks. If an accident or insurance claim happens, payments and your account might be frozen until the situation is resolved. Companies with only one or two customers are also at the whim of their customers business. If the customer has a change in their operations, is sold, moves, or goes out of business, you may be suddenly left by the wayside.
Developing a broad roster of customers is key to avoiding bad debt that might pop up with concentration. A business operator can focus work on one or two primary customers, and spread their resources out to others. Kevin Standa, the Credit Manager at Scale Funding, suggests no more than a 25 percent concentration with one customer and states that a 60 percent concentration with one customer is high risk for bad debt.
Everyone has heard the saying, “the squeaky wheel gets the grease.” It is true when it comes to avoiding or reducing bad business debt. When performing work, communicate to the customer, any issues that may affect billing and payment. When invoicing the customer, follow any directives or guidelines they require. Doing so helps get your invoice processed into the customer’s payables system and eliminates one potential delay in payment.
When the invoice due date arrives, but payment hasn’t, reach out to the customer. An email reminder of the open invoices and request for payment status can be a good start. If payments are still delayed a week after the due date, get on the phone and call. One of the harder, but necessary actions a business owner might take on late payments is to stop any current, ongoing work until late payments are received. Finally, if a customer is paying late, consider if you want them as a customer in the future. It’s better to move on to a new customer than stay too long with one who might cost your business money in the future.
Invoice factoring with Scale Funding is an excellent way to avoid or reduce bad business debt, and improve the financial strength of your company. Companies factoring with Scale Funding have access to the credit desk, where they can check credit and payment histories on any new or existing customer. The credit analysts provide information from the credit bureaus, as well as data on payments to Scale Funding.
Clients factoring with Scale Funding also have a dedicated accounts receivable specialist who is responsible for managing open invoices and making sure any overdue invoices are paid. The accounts receivable specialists have excellent working relationships with the payables departments at companies across the United States. These relationships help resolve any issues quickly and get invoices paid promptly.
In addition to avoiding or reducing bad business debt, factoring supplies steady cash flow for small and mid-size companies. Businesses use the cash from factoring to meet payroll, manage business expenses, or fund new growth. Consistent cash-flow from factoring eliminates the stress and worry of waiting for customer payments.
Contact Scale Funding today to learn more about our invoice factoring services. If you want to avoid or reduce bad business debt, fill out the form below or call 800-707-4845.