Bad Business Debt

Seven Warning Signs to Identify Bad Debt Before it Happens

Business Strategy  |  4 min read

“I had a bad feeling about that.”

Those are words an entrepreneur should never have to say, but it’s something we hear all the time in the collection world. Frequently, bad debt happens because the party granting credit didn’t attend to the warning signs.

Trust and optimism are great; they’re necessary traits for successful entrepreneurs. But cynicism can take root and grow after being burned over and over. Make accounts receivable a priority and watch your account due dates like a hawk. It’s critical to your survival, especially in uncertain economic times. Here are Seven Warning Signs to Identify Bad Debt Before It Happens.

  1. Any sudden departure from a regular payment history. If your customer normally pays on time, and suddenly doesn’t, it could be a sign something is up. Be firm with deadlines. Even if it’s just a payment software glitch and delay, contact your customer for a friendly check-in. If something is wrong, you can address the payment. Keep in mind that debt loses its value over time. After 90 days the debt begins to lose value even more quickly. Be ready to hand the file to a professional collection agency if you don’t receive payment. If it’s nothing you’ll have a chance to reconnect with your customer.
  2. Your customer tells you they have a problem with cash flow. They tell you because you make it a habit to contact customers the moment an account is overdue. Everyone does. Don’t they? If you discover that your customer’s own customers are slow to pay, you should hear alarm bells and see flashing lights. While you’re there with your customer, ask them to put your company first in line for payment. As always, if necessary, turn the account over to your collection agency if delays go on for more than a week or two (at most!).
  3. Your customer tells you they have a problem with cash flow. They tell you because you make it a habit to contact customers the moment an account is overdue. Everyone does. Don’t they? If you discover that your customer’s own customers are slow to pay, you should hear alarm bells and see flashing lights. While you’re there with your customer, ask them to put your company first in line for payment. As always, if necessary, turn the account over to your collection agency if delays go on for more than a week or two (at most!).
  4. Competition is putting pressure on your customer. Some businesses enjoy first-to-market success. They have literally no competition. It can create a false sense of security. When the pie inevitably begins to be carved into ever-smaller pieces, market leaders can take a sudden tumble. Staying in touch with your customers helps you gauge their business and market. If they’re struggling, you still need to make sure they meet payment terms. It’s possible you’re seeing a problem they don’t want to see, or can’t see find a solution to. Being firm about terms might force your customer to change staffing, or operations, but it can actually be helpful for their business in the long run.
  5. Everything is on sale, or warranties are extended. If your customer doesn’t usually cut prices or put their products or services on sale, or their warranties are suddenly longer than anything else in the industry, be warned. Those changes mean narrower margins or greater long term expenses; both can foster a short-term sales bump, but more sales can further exacerbate a cash-flow problem. Cut rates are a short-cut to a sustainable business. Regular scheduled sales are one thing. Sudden massive price drops excite consumers, but worry creditors.
  6. Drop in product/service quality. Quality is often the first victim once price cuts begin. It can have a negative impact the bottom line, taking a further toll on cash flow which in turn can effect payroll or creditors. Negative buzz can can serve as an early warning system if the word on the street it the product “isn’t what it used to be.” Your company may not be affected yet, but knowing the health of your customers’ business can help you keep your own business healthy.
  7. Key Staff Move On. When long-timers and key players depart, you might be left wondering if it was an executive house cleaning, cash flow problems, or layoffs. The last two are especially bad. If sales people are the ones migrating to a competitor, that could affect your customer’s bottom line. Any significant change in key staff – especially multiple key staff – is worthy of your attention and vigilance.

It’s rare when an overdue account appears out of the blue. There are almost always warnings. Being vigilant and acting quickly when an account is overdue is key to avoiding trouble.

Credit is based on trust, but get a credit report and be alert to write-offs, judgements, fraud, or prior collections as warning signs. Especially for big accounts, they bigger they are, the harder you fall if they go down. Keep an eye out for these seven signs, and protect your business.

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Brian Summerflet Author: Brian Summerfelt

President and CEO of MetCredit USA, America’s debt collection and accounts receivable recovery agency.

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