Avoiding bad debt: How to protect yourself against bad debt losses

Avoiding bad debt with factoring

Every entrepreneur bears the risk that his customers do not pay open invoices. The lack of money puts a strain on the seller's liquidity. If several customers are unable to pay, even your own business existence may be threatened. To avoid this risk, effective receivables management is the best protection against bad debts, especially for small and medium-sized enterprises (SMEs). If you are self-employed or freelance and have no time or staff for accounts receivable accounting, you can outsource the task. Here, full service factoring is particularly suitable for avoiding bad debt losses at low expense.

How does an outstanding debt come about??

An outstanding receivable arises when a company sells goods or services on credit. This means that the buyer receives the product immediately, but payment does not take place until a later date. Between commercial customers (B2B) the term of payment is often 30-90 days. During this time, the seller waives the money and grants the buyer an interest-free loan. The payment date is noted in the sales contract or on the invoice. If the debtor does not pay when due, the first thing that happens is a delay in payment. If there is still no payment despite reminders, the seller must assume that there is a loss of receivables. In order to protect its own liquidity, a company should take various measures to help assess the solvency of its customers and avoid a bad debt.

Why do bad debts occur?

There are various reasons why a debtor does not pay his invoices. Either external circumstances or internal difficulties prevent the customer from meeting his payment obligations.

These external causes can lead to a payment default:

  • Poor economic situation
  • Changed buyer behavior
  • new competitors on the market
  • Products no longer up to date

In addition to external problems causing a drop in sales, internal difficulties can also cause your customers to default on their receivables:

  • Lack of payment morale
  • Lack of time or lack of staff to handle the accounting
  • Overindebtedness
  • Insolvency

In order to obtain effective protection against bad debts, you can take certain precautionary measures with your customers, especially against the internal causes. Otherwise, a bad debt can quickly occur, which can put a severe strain on your company's liquidity.

What are the consequences of a lack of liquidity?

Companies should use various means to avoid bad debt and protect their own liquidity. Otherwise, there will be a liquidity gap, which can extend and lead to the insolvency of the company. The lack of liquid assets makes itself felt in these areas:

  • Incoming invoices can not be paid immediately with a discount
  • the overdraft facility of the business account is used and costs interest
  • Salaries and social security contributions cannot be paid on time
  • Rent and insurance premiums are not paid on time
  • Sales tax cannot be paid to the tax office
  • Vehicles, machines or other assets must be sold

Once its own payment difficulties become known, a company loses reputation and creditworthiness with suppliers and financiers. That's why it's important for every creditor to avoid any kind of bad debt and to provide appropriate bad debt protection at an early stage.

5 tips how to avoid bad debts

Here are some tips on how to avoid bad debt and protect your company's liquidity: