Bad Trade Debt: Five Ways to Protect Your Business

In our last article we looked at the dangers of providing credit to customers by giving them 30 or even 60+ days to pay for your goods and services. We compared this to juggling hand grenades in your office, never knowing if one of these trade debts is going to ‘go off’ and destroy your business.

Could you afford to take the hit if a large customer went bust owing you several months’ worth of invoices?

Even if the answer is yes, it’s hardly an appealing prospect and a single bad debt will have a significant negative effect on your business finances. However, SMEs which trade with other businesses (B2B) often have little choice but to offer a degree of trade credit.

Manage Your Credit
Whether you are forced to accept payment of invoices 60 days after receipt by a big customer, or you simply want to offer a 30day facility to show goodwill towards clients, if your business trades on these terms it is effectively providing business finance to others and you need to be fully aware of the costs and risks this entails.

Businesses offer each other credit all the time and bigger companies have developed many useful ways of managing this situation. Small business owners are at a disadvantage because they don’t have the financial skills in place within the business to do this. However, there are a number of relatively simple techniques that can help your business cover the risks of trade debt going bad.

These five methods all help to provide protection to businesses offering credit terms on their invoices. Some of them also offset the cash flow burden that accepting late payments entails:

Use a Credit Agency
Investopedia defines a credit agency as “a for-profit company that collects information about individuals’ and businesses’ debts and assigns a numerical value called a credit score that indicates the borrower’s creditworthiness”. For a small fee, you can consult one of these agencies and get that score for your prospective clients. You may also be able to buy a more detailed report into their finances, if necessary. This will give you a better idea of who you’re dealing with and will help avoid falling foul of bad payers and companies that are already in financial difficulty.

Register on the PPSR
We’ve talked before about why every Australian business should use the Personal Property Securities Register (PPSR). This excellent and relatively new tool allows you to register your ongoing interest in the goods or assets you are selling on ‘retention of title’ terms. Should the customer default or go broke before they have fully paid you, this will make it much easier to simply take back the goods in question. It will also ensure you ’secured creditor’ status.

Know Your Recovery Options
We recently looked at some of the ways that you can get your money out of clients who can’t or won’t pay. But if despite your best efforts a client simply can’t settle an invoice, perhaps because they’ve gone bankrupt, it’s best to act quickly. If you registered the debt on the PPSR, you could take back the goods you supplied. If your client is still solvent, you could hire a debt recovery agency to deal with them.

Consider Trade Credit Insurance
Trade credit insurance literally protects your business from bad debts by insuring your accounts receivable against unpaid invoices caused by customer bankruptcy, default, political risks, or other reasons agreed with your insurer. It’s also known as debtor insurance, export credit insurance and accounts receivable insurance. Of course, using trade credit insurance does add further to the cost of extending credit terms to clients.

Cover All Bases with Invoice Financing
Arguably, invoice financing offers the most comprehensive answer to your trade credit issues, because it addresses the cost as well as the risk elements. Using a smart business funding partner like OptiPay means you can get access to the cash you invoiced immediately, while the debt is insured through OptiPaySecure. You can then use this system to stop relying on credit from your own clients and negotiate discounts with them as a result. This means that you not only improve your cash flow, but also effectively offset the cost of funding and mitigating the risk of the credit terms you extend.

Because OptiPay is so flexible, a business can selectively insure the risk of a specific invoice or debtor, if it feels the need to ring-fence certain transactions – the potential hand grenades. This can be a very cost-effective solution compared to running an entire ledger credit insurance policy.

Business, in particular credit, is changing: SME’s may not have the time and resources to keep abreast of everything, but they can work with partners that do. That’s where the smart money is.

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