6 Ways to Predict a Bad Debtor

Being able to quickly recognise and respond to negative changes in your customer’s financial situation is imperative. The early warning signs are there, it is just about being aware of them. This article will help you make smarter decisions for your business by knowing ways to predict a bad debtor.

1. Change in payment behaviour

This will be a relatively easy one to spot, particularly if you have been working with someone for several years and have a good relationship.

Some clients pay as soon as the invoice lands; some the day before it is due and others a few days after. The trigger will be when one of these patterns starts to drift, check for those red flags.

So, what do you do? One thing you do not do (and cannot afford to do) is ignore it.

ways to predict a bad debtor

2. Lack of communication

No-one likes being in debt. However, sometimes circumstances spiral out of control and before you know it, the invoices are mounting up. Do not let yours become one of them. If calls and emails start to go unanswered and ignored, act on it.

Try and understand the cause of the problem first, establish the situation your client is in. However, if they continue to not respond, outline your next move via voicemail (backed up by email), then begin the debt recovery process.

ways to predict a bad debtor

3. Cashflow problems

Your invoice is now overdue.  When calling to follow-up, try and establish why this is?  Is it going to be a regular occurrence?

Some debtors believe they can withhold payment until their clients have paid them. Regardless of your client’s cash flow, they should pay you in full and on time in accordance with what you agreed.

Agree a deadline with your client and remind them that you may charge them interest under the Late Payment of Commercial Debts (Interest) Act 1998.

ways to predict a bad debtor

4. Staff turnover

There are generally two key reasons for this.  Staff themselves read the writing on the wall and decide to take the decision into their own hands and find alternative employment.

The other is unfortunately downsizing to try and improve cashflow.  Neither is particularly nice; however, they are another sign to watch out for.

ways to predict a bad debtor

5. Change in offering

Businesses like to diversify.  It is good to offer different products and services.  To completely change offering is no good for anyone, least of all you as the creditor.  With it comes possible investment – where has that money come from?

Maybe there has been a change in the level of service being offered by your client?  How is their industry performing?  Any challenges being experienced could be another factor in their ability to pay you.

6. Trust your instincts!

Nothing is as strong as intuition.  If something does not feel right, chances are it is because they are not.

Spotting a bad debtor comes with experience.  Once bitten, twice shy some might say.  It would be perfectly reasonable for you to question why payment is going to be late (particularly if it is becoming the norm).  Keep these clients on your radar and continue with the follow-up.

If you are experiencing challenges with clients paying, contact us here for further information.

ways to predict a bad debtor

When faced with late payment excuses and bad debtors, here are some things to consider:

  • As a creditor, late payments can affect you greatly.  Delays can impact your own cash flow which can quickly cause problems for smaller businesses without significant cash reserves or easy access to temporary finance.
  • Your company is owed this money and you have a right to seek payment whether they are waiting for payment from their customers or not!
  • Make it easy for your clients to pay you, explore different payment options. We advise our clients not to accept cheques though OR add an administration fee for cheque payments.
  • Keep the lines of communication open.
  • Even if the excuse seems genuine, if an agreed payment deadline has expired, you are entitled to be paid on time and in full, regardless of your client’s cashflow.
  • You are permitted to charge interest on overdue invoices: 8% (above the bank base rate) annual interest for each overdue invoice PLUS a Late Payment Fee of £40, £70 or £100 (per invoice overdue).
  • Excuses will often be a means of delaying payment for as long as possible.
  • You should not be treated as less of a priority than other suppliers.

A good credit controller will resolve queries and ensure you receive payment on time and in-accordance with the credit management policy.