Bad debts could be fatal for startups. Many newbie entrepreneurs are forced to shut down their businesses due to bad financial decisions. The reasons are multiple.
There might be no adequate funding, not setting credit limits, or not having clear terms and conditions which might force customers to pay on time. Therefore, you have to be aware of these issues and prevent them at all costs. Here are the most useful tips on how to protect your startup from bad debt.
To maintain your business growth and protect your startup from bad debt, you need sufficient business funding. It is vital for the sustainability and establishment of your company, especially for small businesses. The right small business finance for your startup is one of the most significant things you have to secure. Understand your current situation, know your priorities, and choose the option that entirely fits your startup needs.
The very first step to adequately protecting your business from bad debt is to maintain effective credit management. By checking every customer, you will be aware of any issues they are facing. You will also need bank and trade references to have a clear picture of their credit-worthiness. However, you must be the one who decides which trade references should be used. Don’t allow the customer to highlight their favorite source.
Set credit limits
To control your exposure to bad debt, you have to set and review credit limits continually. For new customers, it might be better to set a lower credit limit until you realize how they will pay. In those long-lasting customer relationships, you should already know how to set a limit since you are aware of their payment habits. Understanding your customer base is crucial to understand those limits.
Know your customer base
You need regular credit reports. They are vital in all cases whether the customer relationship is long-lasting or relatively new. Those credit reports allow you to be fully informed of every change within the business, and they are cheap and pretty quick. You can either run a check every three or six months or use one large order as a trigger. It will limit your exposure and provide peace of mind. After that, you will be able to identify those high-risk business prospects.
Many of your customers might have a habit of paying late. However, you can take several steps to encourage them to pay faster. There are creative collection strategies, as well as direct payment methods. You can call them, have a short chat and inform them about your interest. To be aware of your customers’ habits, you have to track changes in payment patterns, as well as times and delays. All these small factors can reveal those routines of your customers.
Set terms and conditions
Before you even start with the sales of your products or services, you should have a contract of sale with transparent terms and conditions. In the contract, you should include the terms of payment as well as the preferred payment method, especially if you are a startup owner. On top of that, make it all visible on your website. This area of business is crucial – if those terms and conditions are unclear, it can quickly lead to bad debt. Also, don’t forget to point out the frequency of payment and to communicate the dates.
An initial deposit might be a good idea
You should always strive to reduce the risks of not getting full payment. How to achieve that goal? An initial deposit is usually one of the best ideas. Every customer that pays a significant amount as a deposit will, very likely, keep paying until the end, because there is already a lot of money invested. Even though this method might seem harsh in the beginning, it is still beneficial. Many customers might disagree with this. Therefore, to make the right decision for your startup, it would be wise first to get to know your customer base and then decide on an initial deposit.
Tracking payments with tech solutions
To prevent bad debts, you have to monitor your payments regularly. There are many tech tools that are designed to help you with this goal. As a result, you won’t lose track of due payment, and also, a potential mistake will not be unrecorded because of human error. Many accounting applications allow you to create and track invoices and payments, but also to scan all receipts. That way, you will reduce the risk of an improper recording of payments to a minimum. Again, mistakes are always possible, but with the help of tech software and solutions, you will lower all potential risks.
As a beginner entrepreneur, you have to make smart financial decisions. Any mistake can be fatal, especially when it comes to debt. Hence, keep those tips in mind, and don’t hesitate to seek professional advice.
Check out my guide on how to start your business right with tons of useful tips I learned by successfully starting, building, and selling multiple companies.