Everyone tells you to avoid bad debt expense, but can we really anticipate these situations and recognize possible bad debtors?
Debt prevention is hard and it doesn’t always bring the expected result, but it can definitely decrease the number of bad debtors and boost your small business cash flows.
In this article we provided you with a few tips that will help you to build an effective debt prevention strategy.
5 Best Debt Prevention Strategies to Reduce Bad Debts
1. Ask smart questions
Before you sign any kind of business deal you should have an interview with your new business partner. During this talk try to find as much information as you can about their business. Basic information should include company’s name, registration number and niche. You need this for doing a background check.
You should also find out their future plans and the reason they need your products or services. Try to find out more about their financial model, because their payments are probably in some way dependable to their cash flow.
2. Make a debt collection strategy
Every company needs to have an effective debt collecting strategy. In the beginning this strategy should include: phone calls and reminder bills. You should also discontinue the delivery of products or services to companies and individuals that don’t pay their debts on time.
If the debt is not settled after some time you should let professionals deal with it. Do your research on agencies and conditions they offer, and try to pick a local one. So, if you run business in Western Australia, choose a debt collection agency from Perth, if you do business in South New Wales, choose the one from Sydney etc.
Also, it pays to hire an outsourced chief financial officer or fractional CFO to help you in creating your best debt prevention strategies. A fractional CFOs or part-time, outsourced, or virtual CFO can provide you access to highly valued resources.
The main tasks of CFOs include analyzing financial data, reporting financial performance, preparing budgets, and monitoring costs. With such expertise, you’ll be able to easily determine viable businesses you can partner with instead of taking a long and winding journey of trial and error, risking your assets and your business.
A CFO can help you create the right strategies that are realistic, flexible, scalable, and agile. Fractional CFOs have many years of business leadership experience working on a contract basis instead of full-time. It means that hiring a fractional CFO provides services by demand, saving you more money than hiring a full-time CFO.
Read Also: 8 Ways to Finance a Startup Business
3. Do background check of your business partners and companies they represent
Thorough background check is an imperative when it comes to debt prevention. Banks always ask for credit report before approving your loan and in the same way you should try to find out as much information about the company you are doing business with.
If you’re doing business in Australia, for example, you can check whether certain company is legitimate at Australian Business Register, and you can confirm that information on Australian Securities and Investment Commission website, which is also the place you can report companies that you think are acting illegally. Do a local check based on where you reside.
In addition to this check you should also Google the company’s name, together with the names of its main representatives and executives. Also try Googling their names together with the words ‘fraud’ or ‘scam’ in order to find possible fraudulent actions they were involved in.
4. Determine payment terms in detail
Start from payment methods, understand all of their benefits and disadvantages and choose the one that creates minimum risk, meets the needs of your financial plan and it is acceptable for your customers and business partners.
Then you should closely determine payment terms that include time frame and payment expectations and you should make sure that everybody is clear about that.
Add all that into contract and be up to date with business law. If your company doesn’t have lawyers in its ranks, you can always outsource legal aspect of this process.
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5. Ask for references
If you are making big deals that include prolonged payments and lots of work and investments from your side, you should always ask your new business partner for references. Such verification step is crucial to establishing full trust and confidence between two parties involved in a business transaction. Besides, it’s one of the great lessons you’ll learn from traditional financing institutions like banks.
You can do it more or less officially, but be sure to call all mentioned companies and individuals and check the company you are planning to do business with.
If some of these companies don’t confirm their story, don’t break the deal immediately, first give them the chance to explain why they gave you wrong information and ask for more references.
Along with obtaining references, it also makes sense backing up your verification process with technological solutions, such as using API for credit checking. This technology allows you to conduct soft credit checking while gaining similar results of hard credit checks without impacts on the credit records of the borrower.
With implementing smart debt prevention measures you will definitely avoid many unpleasant situations and improve your business cash flow.
When it comes to specific actions you should always look up to banks and mortgage companies and copy some of the measures they apply to their clients.
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