Bad debts are a nightmare for small and medium-sized businesses. You put in all the work for an order, incur all the costs – and pay them up front – and then your invoice goes unpaid: in the worst cases, this can put your business in serious financial difficulties.
Depending on the size of your individual orders and invoices as a proportion of your turnover and profit, a single bad debt could lead to years of cashflow problems, as you are forced to take on extra business finance to cover the loss. Many a small business has gone bust as a result of an unpaid debt.
These scenarios are hardly uncommon, and yet many SMEs do little to protect themselves against the possibility of bad debts, relying instead on blind faith in their customers.
How Common are Bad Debts?
Recent research by the UK government found that the average bad debt suffered by SMEs in Britain increased by a third in just four years, from £12,000 in Q1 2014, to £16,000 in Q2 2018. The construction sector was particularly bad.
Writing for Britain’s Small Business Commissioner in reference to this research, the appropriately named Kash Ahmad said: “This not only places a significant strain on businesses – sometimes even causing viable firms to fold – it also represents a huge economic leakage that needs to be addressed. However, unlike late payment, which is understood and prominent in the hearts and minds of smaller businesses and policymakers alike, bad debt is often overlooked.
“For many small businesses, bad debt has simply become the hidden cost of doing business. However, there are steps that business owners can take to protect themselves. Such measures can include conducting thorough debtor reviews, seeking advice on contract negotiation and considering bad debt protection.”
How to Protect Your Business
The Australian Securities and Investments Commission (ASIC) publishes a useful list of ways SMEs can protect themselves, not just from bad debts but also from problems such as one-sided bank loan contracts.
In relation to ensuring you get paid, ASIC recommends doing some research on any new clients you take on, and monitoring those you trade with regularly. It’s checklist includes:
l Before you deal with another business, ask them for their Australian Company Number, Australian Business Number and any licence or authority they hold to operate in certain industries.
l Verify the information about the companies, businesses or licences by checking ASIC’s registers and other government agencies.
l check whether a company or person is banned or disqualified from managing companies, being involved in financial services or in the credit industry.
l Monitor other companies by registering with ASIC’s free Company Alert service. This service will automatically notify you if documents are lodged relating to the company you nominate.
Invoice Finance Can Also Protect You
Although it is certainly a good idea to conduct due diligence on your customers, even well run businesses sometimes get into difficulty. If a company you trade with does go bust, you will be lucky to get even a small proportion of your outstanding invoices to them paid.
One way you can protect against this eventuality is by using a form of invoice financing that also insures your debts. This means that you always get most of the money on each invoice within days; you will have professional back-up in conducting due diligence and chasing overdue invoices; and the insurance will cover all or most of your loss should a debtor go out of business unexpectedly.
The benefits of invoice finance go beyond business funding – unlike a business loan, which will exacerbate cashflow problems by adding penalty clauses if you miss a re-payment.
The invoice finance packages offered by OptiPay include our bespoke insurance product, which means that not only do you get a cashflow benefit and some great value business financing, you will also be covered against bad debts. Find out more by contacting our team today!