Small and medium enterprises (SMEs) are looking for ways to effectively protect their business from bad debts.

During particularly volatile economic times and unpredictable business environments, shoring one’s business up against bad debts is even more important than ever. Following the suspension of insolvency laws during the early stages of the COVID-19 pandemic, may have hidden the problems for a short period of time, but they have not gone away for good.

There is plenty of risk from bad debt out there, unfortunately, but there are also important ways for a business to reduce exposure to such risk and prevent bad debts from sinking the ship that is their business.

What is bad debt?

The term bad debt refers to either loans or other outstanding balances that need to be written off as a loss due to no longer being considered recoverable.

Bad debt is often considered to be a cost of doing business as there is always a level of risk associated with extending a client or customer credit, however there are ways to reduce the risk of incurring a bad debt-related loss.

For SMEs, taking on bad debt can be highly disruptive to cash flow and access to working capital.

Can SMEs avoid bad debt?

Avoiding bad debt is clearly the best way to mitigate the associated risks of exposure. If your business is able to avoid bad debt effectively, you can enjoy greater peace of mind growing your business from success to success.

So how can you avoid bad debt?

1. Conduct background checks on customers/clients

Before engaging with a new or unknown customer or client, it’s important that you verify their capacity to pay and conduct a background check on them and their record. 

New Zealand maintains a Company Register which is a great place to start your check and find basic credentials and details regarding businesses you may be interested in trading with. You can search the register here.

Alternatively, for a deeper dive into a particular company, you can purchase detailed information and credit history details from third party companies like Equiax, Illion and Experian.

2. Take control of your credit terms

Another way to mitigate the risk of bad debt is through controlling your credit (payment) terms.

While standard business practice in New Zealand has been to provide up to 30 days or more for clients to settle invoices in the past, more recently businesses have been reducing that term to 21 days.

However, your credit terms need to work for you and for your clients so regularly reviewing whichever terms you set is necessary for maintaining good cash flow.

Some businesses have begun to offer discounts for prepayments or early payments to help encourage clients to settle invoices as early as possible. 

Where possible, ensure you receive acceptance of terms in writing and prior to trade.

3. Improve and manage your receivables

Part of encouraging early and prompt payment from customers or clients is ensuring your receivables department supports such practice. Invoicing early, regularly and predictably can help your clients anticipate upcoming expenses and manage cash flow on their end.

Offer clear, flexible and different options to allow customers or clients to choose the best method of payment for their needs. Lastly, maintaining comprehensive records for customers or clients when required will help you keep track of their credit levels and limits, and provide supplementary information when required. 

How can an SME recover debts?

The reality is that very few SMEs can completely avoid encountering debt, but there are some ways in which you can recover outstanding payments before the debt goes bad.

Debt Recovery Strategy

Having a debt recovery strategy ahead of time can help ensure your business has adequate cash flow to continue covering your own debts, meet payroll and continue day to day operations. The first part of your strategy should be a clear process for collections. This process should outline timing and messaging for communications in the event that a client or customer has missed a due date.

Reminders and Records

Being as organised as possible on your end of the transaction is a strong mitigation strategy for preventing debts going bad. Set up regular and automated payment reminders through your accounting software and ensure you have a comprehensive record keeping system to maintain all correspondence and trade activity. 

This gives you the information and support required if you need to send a formal letter of demand. 

Professionals and Authorities

What should you do if a customer or client simply refuses to pay or does not respond to your letters of demand and reminders?

Many businesses are likely to experience this at one point or another. In instances where a dispute arises, you can do one of two different things.

1. Debt Collection Agency

Debt collection agencies are experts in chasing up payments from customers or clients who refuse to pay.

2. Legal authorities

Alternatively, you can consider taking legal action to help recover debts in instances where the outstanding amount warrants such costly activity. 

Of course, not all debts are worth the time, energy, effort and cost involved in pursuing them. It’s important that you consider the best utilisation of your resources before choosing to pursue debts.

Can SMEs be secured against bad debt risk?

The short answer is yes. 

Investing in bad debt protection is an effective way of securing your business against the ongoing risk of bad debt which can often be outside of your control. In instances where a customer or client is insolvent or otherwise unable to pay, protection from bad debt can still insulate your company from consequential working capital shocks.

Invoice Finance Solutions

Invoice Finance solutions effectively secures your business against bad debt by providing you with access to up to 95% of the value of your unpaid invoices prior to the accounts being settled.

This flexible and customisable solution allows businesses to leverage the value locked up but existing in their outstanding invoices to access working capital almost immediately. That way, you can rely on more stable, predictable and accessible cash flow coming into the business.

No security is required for this line of credit either, and with facility limits ranging from as little as $10,000 to $150 million, there’s a solution for every sized business.

Contact ScotPac today to find out more

If you’re interested in exploring the potential of Invoice Finance for you and your business’s protection from bad debt, give our team of local specialists at ScotPac a call.

We don’t view our clients as transactions–they’re partners and together we work to add the necessary fuel to enable growth. So, let us work with you today.