How To Avoid... Bad Debt, Credit Risks And Missing Out On Debt Recovery

In the third of our new series of articles on "How to Avoid..." common legal problems, Cassandra McCarthy looks at the steps that you can take to avoid bad debts and credit risks, and provides some practical advice about how to recover debts. Key Points to Remember: How to Avoid... bad debt, credit risks and missing out on debt recovery:

Know your client Obtain signed Terms of Business Take steps to recover the debt Consider Insolvency or Court proceedings In the current climate it is commonplace to see credit periods being extended by businesses. Debt is also turning into bad debt, which cannot be recovered due to the debtor being insolvent. This article looks at the practical ways in which you can avoid bad debts. If a debtor is not settling his debt, you will need to assess whether it is a situation where the debtor will not pay or cannot pay. This article provides you with helpful tips and guidance on how you can decide whether it is worth pursuing the debt and if so how you can recover the unpaid invoice.

1 – Know your client

It is important to first assess whether you should take on a new customer. You should consider whether they had a previous supplier and if so establish why they left that supplier - for example, was it because they were unable to pay their invoices and they are now shopping around for a new supplier to obtain more credit? It is always worthwhile carrying out credit checks on a potential new client. This will give you an initial view of the company and its financial position. As the market is competitive in the current climate any new client is an attractive prospect, however, do not be blinded by this. Take the time to do the initial research into the customer, as they may not actually be a worthwhile proposition.

2 – Obtain signed Terms of Business

We strongly advise that you have Terms of Business in place. You need to make sure they are clearly and comprehensively drafted. If they are not, then they may not be worth the piece of paper they are written on. You need to ensure that they cover your business needs and clearly deal with payment terms and expectations. The Terms should set out concisely your rights of remedy in event of default of payment.

Companies often have Terms of Business but for them to be enforceable they need to be incorporated into the contract. You should take all necessary steps to bring the Terms to your customer's attention, such as notifying them of the Terms in advance of an order...