While a few bad debts aren’t too much cause for concern, they can heavily disrupt a business’s cashflow over time. As a result, the business’s profitability will be adversely affected or they  might fail to invest according to their investment plans. For some businesses, bad debts may even result in insolvency.

During the pandemic’s worst waves, the Australian Securities and Investments Commission (ASIC) brought temporary relief structures into effect to help many businesses on the brink of insolvency survive. However, the ASIC has now done away with relief structures – causing a rise in business insolvencies.  

According to Ilion’s July 2022 Monthly Report, insolvencies have been their highest since the beginning of the pandemic in 2020. Now more than ever, taking measures to help you minimise your risk of bad debts is crucial.

How to minimise risk of bad debts

B2B businesses are especially vulnerable to bad debts as transactions often involve extending credit to customers. Here are a few tips that can help you minimise and manage the risks associated with them.

1. Complete credit assessment and reference checks before offering credit

The most important thing to do during onboarding with potential customers is to assess their creditworthiness. Proper assessment of credit applications will help identify the customers you can and shouldn’t offer credit to, based on their level of risk.

Running a credit report is crucial to credit assessment. A credit report will give you a variety of information such as:

• A company’s payment history
• Up-to-date information about a company
• Management details
• Credit score
• Crucial financial data

Check trade references for past payment records and the length of time your prospective customer has worked together with other businesses. During this process, you may notice late payments. While one or two shouldn’t worry you too much, repeated late payments should be a clear warning.

Some other steps to ensure comprehensive credit assessment include assessing your potential customer’s financial history through big data and conducting in-depth analyses of the most recent filed accounts.

How an enhanced credit application process can protect your business from bad debts

2. Encourage prompt payments

If your customers pay you on time, you won’t have to worry about your business incurring bad debts. There certain steps to encourage your customers to complete their payments on time. Some of the best efforts to take in this regard include:

1. Make payment terms clear

There should be clarity between you and your customers as far as the payment terms are concerned. To achieve the required level of transparency, you should write down the terms politely – this ensures that you share positive relationships with your clients. Next, set precise payment deadlines, and use language that’s direct and to the point.

2. Get Direct Debit Authorisation

Direct Debit payments are an excellent way for you to ensure on-time payments. Once a customer provides you with a direct debit authorisation, you can collect payments from their account on the agreed-upon date without having to chase your customers. Integrating direct debit payments in your AR platform opens up even more possibilities for automation that can get you paid faster and improve your customer’s payment experience. It’s a win-win: customers improve their payment behaviour, and you get paid on time to ensure a better cashflow.

Five reasons why you should use Integrated Direct Debit

3. Offer discounts or credit term extensions

Direct debit payments make it easy for you to get paid on time. However, not many customers find this payment option attractive as it can appear that they do not have control over their accounts. Incentivising this payment option can give them more reasons to sign up. For instance, you can provide credit term extensions to customers who provide you with direct debit authority to collect payments.

You can also provide discounts for customers who paid ahead of time. Payment incentives can go a long way toward motivating customers to pay early and reap the rewards for completing their payments.

4. Send invoices on time

You can’t blame your customers for not paying you on time if you’re the one sending invoices late. Through AR automation, invoices are sent to customers promptly through email or SMS. Sending invoices on time gives your customers time to prepare and pay you based on payment terms.

4. Make it easy for customers to pay you

‘Pay Now’ buttons on your invoice reminders make it easy for the customer to pay you and provide that check-out experience most of us now expect when making payments.

Flexibility in terms of payment can also serve as encouragement for customers. For example, one customer might favour calling you and paying through a credit card. However, others may feel comfortable paying you using an online payment platform that they can access. Flexibility can also come in payment instalments in which qualified customers can part-pay the invoice via a third-party finance provider who will pay your invoice immediately.

3. Monitor outstanding invoices

Reducing your daily sales outstanding or DSO is another vital step to minimise bad debt risks. However, to reduce it, you need first to monitor your outstanding invoices. A credit risk monitoring tool integrated into your AR automation platform can help you by using business credit and late payment scores to monitor outstanding invoices and measure their risk for bad debts. Access to credit score data gives you more control and insights into the next steps to take in debt recovery.

What is a business credit score and other FAQs

4. Follow-up on overdue payments

If there’s an overdue payment, you need to follow up immediately to increase your chances of receiving the payment. However, there are different approaches to following up on customers, which usually depend on the customer and how late the payment is. Here are some actionable follow-up tips for you to apply:

1. Implement an internal payment collection policy

Your business should have an internal payment collection policy to guide your AR team in chasing payments. The policy should include when to send payment reminders and how many before you should make a phone call. It should also clearly state when to consider clients as high risk for bad debts and when you should escalate overdue payments for third-party debt collection or legal advice.

How to ask customers to pay their outstanding balance during COVID-19 (+ email template to get paid now)

2. Send payment collection reminders or demand letter

Persistent reminders make a difference in getting paid on time. However, this can be tricky as doing it wrong may ruffle your customers’ feathers. You can rely on automated communication workflows to do it easily. Always be prompt, persistent and polite when sending reminders and notifications.

3. Talk to customers on the phone or in person

If your emails and messages are ignored by your customers after you’ve sent a certain amount of reminders, it might be time to call them. However, remember to keep your tone professional and always give your customers the benefit of the doubt. This will allow both sides to discuss possible disputes on orders and invoices or cashflow issues that the customer has that prevent them from paying debts on time. Getting a clear understanding of the situation is your best bet in finding resolutions that work for both parties.

Collection call 101: Getting the results you want over the phone

4. Record all communications with customers

When you follow up with your customers regarding overdue payments, you must record all communications. Recording all communications with your customers ensures you have proof of your diligence in reminding payments and that there’s transparency of information for both parties. These documented communications will also clear any misunderstanding that may arise on future follow-ups; or when the time comes that you have to escalate the unpaid invoice to a debt collection agency or lodge a court complaint.

5. Use an AR automation platform

An efficient way to implement internal debt recovery measures and track communications is through AR automation software. AR automation provides communication workflows that can help streamline reminders and follow-ups to customers. These tools make tracking outstanding invoices and overdue payments effortless by sending automated reminders to customers whenever they detect unpaid invoices. You can also customise the workflow according to your business’ policies and customer payment terms.

5. Debt recovery measures

If all internal payment collection measures fail, the next step is to seek professional advice from debt collection agencies or legal counsel.

1. Third-party debt collection services

Debt collection agencies are knowledgeable with the know-how and the expertise to extract pending payments. Choosing which debt collection agency to hire can be a task in itself. However, an all-in-one AR automation platform can also provide access to a directory of debt collection agencies, further streamlining your debt recovery process. Before proceeding with this measure, you must let your customers know by phone or through a letter that you plan to pursue debt recovery services.

2. Court claims

When all other debt collection measure fails, it might be time to lodge a court claim. This measure is often the last resort for businesses, as it is costly and time-consuming and will likely cause friction in the relationship between business and customer.

Effectively manage bad debts with AR automation

Any business must learn how to manage risks during economic uncertainty. Bad debts can put a dent not only on a business’ cashflow but also hamper growth, which is why it’s crucial to minimise late payments. Ensuring best practices during onboarding, transparency of information, and providing various payment options are actionable ways that you can do to help improve customer payment habits, ultimately reducing the risk of bad debts for your business.  

Effective management of bad debts improves your cashflow. If you’re curious to learn how AR automation can help you effectively manage and even minimise the risk of bad debts, let’s chat, and our AR experts can walk you through options fit for your business.