Knowing Your Customers and Suppliers
When you set-up, and run, a business you want to know that you will be paid on time by your customers for the products and services you supply. In the same light you want to be certain that your suppliers will be able to deliver your resources on time, and to the right specification.
These are two factors that will ultimately determine how effective the cash flow is within your business and how much time and money you will need to commit to getting things right. Choosing your suppliers carefully, as well as assessing your customers before delivering your goods and services will allow you to reduce the amount of bad debt in your business.
Assessing Credit Worthiness
One of the key measures in managing bad debt is only taking on the right customers. When consumers, either individuals or companies, take on a credit agreement with another company or financial institution, they commit to honouring the agreement and ensure that all payments will be made in full and on time. If they default on this agreement then the lender may put a black mark against their name. In actual fact, every individual (over the age of 16) and company in the UK has a credit reference file. This is used by companies to monitor their previous credit history and make entries of any incidents where the customer has defaulted on a loan or credit agreement such as a credit card. This information is shared through agencies such as Equifax and Experian to allow other businesses and individuals to make informed decisions about an applicant's credit worthiness.
Credit reports are usually headlined with a credit score (the scale of these vary depending on the agency). It's generally seen that the higher the score, the healthier your credit file, and the greater than chance of receiving credit. However, this isn't always the case. Some credit providers purposely provide credit to lower scores.
There are a number of tools available online to access credit information relating to a limited or non-limited business. This information can range from a simple credit score and credit limit to a detailed report that includes previously filed balance sheets and profit and loss accounts. This type of information will enable businesses to make more informed decisions about a prospective customer or supplier before delivering their products or services.
Recovering bad debt
The law discourages individuals and businesses from settling invoices late by allowing companies to charge late payment penalties if they wish. Late payment penalties must be calculated as a percentage interest rate usually at 8 percent above the Bank of England Base Rate. The law also permits you to challenge customers who attempt to impose their terms and conditions that remove your rights to claiming interest or compensation. If your business employs less than 250 people then you can ask a representative of a trade body to go to court on your behalf to challenge such terms.