For any enterprise looking to grow, every new customer is a reason for celebration, particularly if that customer brings in significant business. However, some customers will inevitably have problems making payments on time – or at all.

While large businesses have their own departments for dealing with credit issues, owners and managers of smaller companies must chase outstanding debts themselves. Your business won’t be able to avoid the problems of late payments or bad debts entirely, but our tips can help minimise their impact on your bottom line.

1. Don't wait until there's a problem

Taking steps to protect your business against bad debts before they arise can ensure the best possible outcome for you and your clients. If possible, carry out credit checks before reaching any agreement with a new customer. There are numerous credit-reporting agencies, some of which focus on the needs of small and medium enterprises. A poor credit record doesn’t mean you need to turn away a customer, but it could prompt you to require upfront payments for a period or simply reduce credit limits for that customer.

2. Make your terms of payment clear

It’s important that you are clear with customers on what they are obliged to pay and when, as this will define what rights your business has in pursuing debts. Written terms of trade should lay out exactly what is expected and what will happen if customers are unable to pay on time, such as penalties or interest on outstanding debts. Not all businesses have such written agreements, but all invoices should at least prominently show exactly when payment is due.

3. Keep in contact and keep communicating

Communicating with customers is one of the strengths of smaller enterprises. However, outstanding payments can be a difficult subject to broach. Creating a procedure that your business sticks to can therefore be effective at avoiding unnecessary conflict with a customer while still meeting the need to have the issue resolved.

A procedure such as the following can provide a template for dealing with outstanding payments. 

• Reminder letters: Whether one or more, reminder letters are a good starting point as long as they are sent out promptly. After all, invoices are misplaced, lost or simply forgotten by all of us at some point.
• Personal contact: Contacting a customer directly can be highly effective. You may be able to discuss payment options that the customer might otherwise have been unwilling to raise. If handled well, you could end up with both the money owed and a fiercely loyal customer.
• Final notice: If the issue has not been resolved by this point, a final notice should be sent.
• Letter of demand: A final step before deciding how to pursue the debt through an agency or taking legal action.

Of course, there is no need to go through all these steps in order, or at all, if it is not appropriate to your business.

4. Let others do the chasing

If you have gone through all the above without success, engaging a debt-collection agency is likely the next step. Compare fees and/or percentages and the type of services they provide. A collection agency may be a good fit, or you could speak to a law firm about taking legal action directly.

5. Know when to cut your losses

The final option is to simply write off the debt. While this option may seem like giving in, remind yourself that the primary consideration should be what will benefit your business the most.

If you are forced to write off debts or have ended up with a court order that is unlikely to be enforced, direct your frustration towards creating a more effective set of credit controls that will help your business thrive. Using these tips can help ensure your time is spent on those customers who will grow your business, not those dragging you down.