Head of EQ Property & Construction Steven Todd provides tips to protect your construction business from bad debt.
Bad debts are a problem that affects most businesses, irrespective of size or sector; however the issue is particularly problematic for smaller firms who often have to incur upfront costs, many of which don’t have sufficient cashflow to survive.
Small firms in the construction sector are particularly affected by bad debts, with 29% of owners reporting bad debt over the last year. Small construction companies were forced to write off as much as £15,000 on average.
Bad debt can occur for a number of reasons and business owners often don’t have the financial resources or access to advice to pursue legal action for recovery.
So how can you protect your business from bad debts?
Implementing tighter controls is your first line of defence. It’s the best way to avoid or limit your exposure to bad debts. Complete thorough business and reference checks before you offer credit to new customers and set reasonable credit limits.
Draw up clear terms and conditions (using your professional advisers if necessary). Make customers aware of them and get customers to agree to your terms of trade. Publicise your terms on your website and send a copy with your goods and invoices. Include a clause stating that you continue to own goods until they have been paid for.
Good accounting systems help to avoid bad debts and the problems involved in recovering them. Send out your invoices and statements on time, preferably as soon as the job is completed. Late invoices can get missed and often get paid late. Larger businesses have set payment cycles so prompt invoicing means you’re less likely to miss the next payment cycle. Keep an up-to-date record of what each customer owes you and note any customers approaching their credit limit. Follow up immediately once payment has not been made.
Resolve any disputes quickly (e.g. if the customer claims the goods were faulty). You are unlikely to be paid until this is done.
Reconsider the terms on which you do business with customers that regularly pay late: for example, increasing the prices you charge them or cancelling their credit facility.
Formulate a strategy in case your debtor continues to delay payment. You might have to write off small debts that are not cost effective to chase. You could also consider putting the customer’s credit facility on hold preventing any further credit sales until the account is cleared. An alternative is to negotiate part-payments or to use an arbitration or mediation service. This can often help to resolve disputes without the expense of going to court.
Involve your professional advisers if your attempts to recover the debt are unsuccessful. Your solicitor can chase the debt for you or recommend a debt collection agency. A solicitor’s letter may be enough to prompt payment without any further action. Small claims (for up to £3,000) can be dealt with relatively quickly and inexpensively using the small claims court.
Consider bad debt insurance. Businesses can protect themselves against the risk of bad debts through credit insurance. Bad debt insurance policies can pay out up to 90% of commercial losses if debtors are unable to make payment.
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