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LEGAL BLOG: Ways to minimise bad debts (and speed up the recovery process when they happen)

Thu, 2015-05-28 15:30

You work hard to be the best at what you do.  You deliver excellent service to your customers, and the quality of your output is second to none.  However, all of this is irrelevant if your customers don’t pay.

Cashflow is the lifeblood of any business, and there are some simple steps you can take to minimise the risk of bad debts.

The most important of these steps is having a thorough knowledge of who your customer is. Where that customer is another business, understanding how that business is structured, how it operates and who its customers are can help you to minimise your exposure.  So, to choose an obvous example, if a seasonal business makes a large order with you during their off-season, there is a higher risk that their own cashflow situation will delay payment to you.  Having that knowledge can help you decide whether the risk is worthwhile and whether you actually want that business.

Equally important is record keeping.  Having a complete paper trail will help minimise disputes and therefore reduce delays in getting payment.  Where disputes do arise, good record keeping means that they can also be closed off quickly and decisively.  In the event that matters reach a court room, that can be incredibly important.

Finally, look out for and heed the warning signs – are your customers’ cheques beginning to bounce?  Are they regularly asking for an extension to payment terms?  Are they raising spurious disputes? Or, worse, ignoring your correspondence altogether?

All of these are indications of a business in distress.  If it happens, you should be giving serious consideration to whether you wish to continue to work with that customer and in some cases you may even wish to introduce special terms, such as payment up front.

Of course virtually all businesses suffer bad debts from time to time.  These steps can both minimise the risk of that happening, and also speed up the process when the time comes to phone your solicitor and ask them to start pursuing the debt through the courts.

Andrew Foyle

Partner, Shoosmiths LLP