• Long Tail Bad Debt Warning & How To Protect Your Business

    How to protect against bad debts following this warning.

    In the wake of the pandemic, many of us are expecting there to be an uptick in the number of bad debts suffered by UK SMEs. Debtors cash flow has been under pressure for several months, and now is the time that many companies will be starting to run out of cash. 

    Of course there are options to ease the pressure, such as government backed loans, grants and tax deferments that will help some businesses that qualify. However, questions remain over how adequate that funding will be, and to what extent we will still see business failures across the UK.

    Long Tail Bad Debt Warning

    I have just read a very insightful article, that outlines the problem well: Beware The Long Tail Of Business Failure.

    The article points out that following a first wave of failures caused by the pandemic, there will the knock-on impact on the supply chains that those businesses sit within. This has the potential to dramatically extend the follow-on impact of failures connected to the CV crisis way beyond the lifecycle of the pandemic itself. The most concerning issue is that the article predicts that bad debt levels will double due to these issues - a frightening thought.

    How To Protect Against Bad Debts

    There are a number of ways how to protect against bad debts, so that your company can continue trading through this crisis:

    1. Watch out for the warning signs of a bad debt looming, so you can take action to limit granting further credit to that customer and / or recover your money as early as possible.

    2. Put in place a robust credit granting processes, to minimise the chances of offering a credit limit to customers that have potential issues. This goes hand-in-hand with strong credit control procedures, in order to make your collections as effective as is possible. See our guide to granting credit and credit control. If you don't have the expertise in house, a factoring company will be able to assist you. You might also consider the length of the credit terms that you are prepared to offer your customers. The longer the terms, the longer you have to wait to be paid - during which the customer's financial position can change.

    3. Consider protection against bad debt from options such as a credit insurance policy, or bad debt protection (sometimes called non recourse factoring, or protected invoice discounting) which is offered as part of an invoice financing package. In many cases the invoice finance company has its own umbrella credit insurance policy, so you benefit from their purchasing power by using their bad debt protection. These options can protect you against the majority of the risk of customers becoming insolvent.

    4. If you really are not comfortable taking any credit risk at all, you could offer your customers cash terms only, requiring payment against a proforma invoice, before goods or services are supplied. However, this option can also appear uncompetitive when compared with the terms that your competitors are prepared to offer.

    5. Many companies have been "pivoting" during this crisis, to offer alternative products and services, or to offer their existing services to alternative debtors. Is there a potential to provide your offering to better quality end customers, that are less likely to fail?

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