Avoiding Bad Debt: Tips to Help You Get Paid

The easiest, and cheapest, way to collect on a bad debt is to avoid it in the first place. There’s no foolproof way to avoid bad debts, but you can limit them.

  1. Talk to an attorney before you do sales on credit. An experienced attorney can tell you what rights you have if a customer fails to pay and help you draft a sales contract that states your business’s policy on payment (including incentives for early payment), interest calculation, personal guarantees, and recovery of attorneys’ fees for collection. They can also tell you what you can’t do to collect what you’re owed.
  2. Most clients show red flags before they default, like repeated late payments or asking for extensions. Make sure you have a system to spot those flags and address them early.
  3. Contact the customer immediately if their payment is late and stay in contact until you get paid. Be clear with the customer what will happen if they continue to not pay and document any conversations you have, especially the reasons for being late and any payment plan you work out.
  4. Send out invoices promptly and regularly. The longer you give the customer to pay, the more likely it is that they won’t.
  5. Follow through and be consistent. Follow your policies in every case. Stick to the deadlines you set for payment, especially if you negotiate a payment plan with a customer. Even if one client absolutely refuses to pay, future clients will see that you take collections seriously and think twice before failing to pay their bill.

Some customers, unfortunately, can’t or won’t pay their bills. But preventing most of your accounts from becoming problems in the first place will keep you and your business in the black.

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