How to Deal With Bad Debts
Running a small business has its challenges: your day-to-day work, staff, social media etc. One thing that you could do without though is customers not paying on time or even worse, not paying at all.
This article is about how to deal with bad debts.
Pay up front
We have learned that it is more difficult to get money out of people for work done than for work not done. Therefore we introduced the policy that for new clients who sign up for a set number of hours, we would issue the first invoice up front. Once the invoice is paid, we start work. Any other work done is billed at the end of the month.
Small businesses sometimes have cash flow problems and unfortunately if they don’t get paid then other businesses providing them services often suffer as a consequence. Invoices can end up being paid a month late or sometimes so late that it could be considered a bad debt.
Another way to deal with persistent late payers is to have a clause in your terms of business like:
“At our discretion, we may charge interest on overdue payments in accordance with clause 5 of our Terms of Business”.
You can then send interest invoices to cover your time spent chasing these debts on a monthly basis.
Set up a payment plan
Sometimes you might not know that one of your persistently late-paying clients is actually in financial difficulty. All of a sudden there are three invoices outstanding, so you need to take action.
It’s not nice but you are going to have to stop providing services to your client until you recover your debt. Normally they find a way to settle the invoices and normal service resumes. However for those who just can’t find the funds then the next best thing is a payment plan.
Agree with your client that it is better that they send you £50 or £100 a month (or whatever sum you agree to) over a certain period than having to take further action to recover the debt. You do need to be stubborn with payment plans, as if you don’t get the funds in on a certain date then you might find they are behind and essentially defaulting on their plan.
Send regular emails and phone calls reminding them on the date the amounts are due and how much is left.
Small Claims Court
If the payment plan simply isn’t working then the next course of action is taking your client (or possibly ex-client by now) to the Small Claims Court. This is suitable for debts up to £10,000.
You need to send them a Letter before Action which will give them time to think about whether they settle their debt with you or in the courts. You can find many templates for this letter online. Find one at a reputable source like Which.
If that doesn’t yield results then you put a claim into the Small Claims Court. You can find the full process on their website.
- You can also check out Money Claim Online which is the online Government debt recovery court process
- Pass the debt onto a debt recovery agency – it’s what they do every day
- Use a solicitor to draw up and send legal letters on your behalf
So if you want to avoid bad debts, think about getting yourself a Credit Control department. This is essentially chasing for payment and can be easily outsourced to a Virtual Assistant company like Red Desk.