We have included some tips for companies on how to reduce bad debt and about reducing risks. Bad debt write-offs can cripple a company’s financial ability to compete and grow, by choking their cash flow.
To help you reduce bad debt, here are three of the most common mistakes to avoid that can cause well-meaning companies to accrue commercial debt.
Giving Credit to All Who Apply
One of the biggest mistakes a company can make is giving credit to everyone who applies.
Credit screening for new credit customers is critical for reducing risk. This is especially true when it comes to larger credit lines.
Even basic credit reports will identify companies or customers who are severe credit risks. In many cases, companies are using their suppliers as a bank to help finance their operations. While this may be good for the customer and their bank, if something goes wrong, their account will become an unsecured bad debt.
An ounce of prevention can reduce bad debt immeasurably.
Missing Critical Details
An efficient accounts receivable operation pays attention to details. To help reduce bad debt, it pays to notice the minor details like a late paying customer changing bank accounts. Little details like address changes, bank changes, and mail returns warrant another look at your customer. Of course, there are obvious warning signs for bad commercial debt.
Change is either good or bad for a debtor company and recognizing a company that is sliding downhill will help in reducing bad debt.
Mistake # 3
Procrastination & Too Much Benefit of the Doubt
It is better to get a small percentage of something instead of 100% of nothing.
Many companies hold on to a debt in the hope that the debtor company will pay. To help reduce bad debt, a smart credit manager must realize that point of no return when trying to collect a debt. Unlike wine, bad debt doesn’t age well and it is better to retain a collection agency and get a percentage of something rather than 100% of nothing.
Procrastination usually results in a debt going from bad to worse.