How do I deal with bad debt in my business?

All business owners will at some time or the other during their careers be faced with a customer or client who has accepted services or products but is unwilling to pay on time or at all. This bad debt is a by-product of good will and is likely to affect most businesses at some point regardless of how careful they are. There is no right or wrong answer to this problem as everything is a balancing act so I will look at the consequences as well as the solutions.


As always prevention is better than cure and that applies to bad debt as well so consider this question. Have you ever been so excited about meeting a new client that you said its okay we’ll take care of the details later? It’s a tough question to answer yes to but probably true for many business owners and highlights the issue that you can create procedures for your business but they aren’t worth much unless you stick to them. So how might we validate the honesty of a client before we issue them credit?

Anti-money laundering checks – members of certain institutions are required to perform these and although they aren’t necessarily a check on credit worthiness they will validate the address and identity of the person you’re doing business with which will make it harder for them to disappear and ignore you when it comes to payment.

Credit Checks – There are many agencies online who will look up a client’s financial history if provided with certain details, this can be a good way to understand how honest they have been in the past but it’s important that the client is notified that the check will be run on them.

CRB – Criminal records bureau checks can let you know if your potential client has a criminal record which might impact their trust worthiness, this might seem excessive but could be appropriate based on the size of the contract.


With business cash flows as tight as ever, offering the correct credit terms can often be make or break on a deal. It’s always worth seeing if a client will part pay of the fee up front or in regular direct debits during the length of the service, it could be the case that they themselves are struggling to find a reliable supplier so they may be willing to meet you in the middle. If your client is a limited company then it might make sense to get the personal guarantee of a director in case the business goes into liquidation.


When extending credit terms to people it’s important to make sure that you make it as easy as possible for them to pay and that every part of the described service was performed to a good standard. This could include providing them with a direct debit facility and it could include making sure they are completely satisfied with the work done.


Businesses with cash flow issues caused by payment terms could consider factoring out their debts and payroll. This is where a third party will lend you a proportion of your outstanding client debts and then will attempt to collect the debt for you. This can sometimes be expensive but often works out quite well if your overdraft usage is reduced and you save time which is then used to grow the business.


This is essentially taking legal action against a non-payer, it should only be considered after an effort has been attempted to work out a solution with the client in order to recover the debt. The most important thing to understand is that you can’t recover assets that don’t exist, so if the business owner you are trying to get to pay up has nothing to their name then even if you win in court, there won’t be anything for the bailiffs to recover so don’t throw good money after bad.

However you decide to handle bad debt in your business, there is no substitute for using your instincts and to completely avoid bad debt you would need to stop taking risks which is not an option for small business owners. If you would like to discuss this issue or anything else in your business then please contact us.

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