CreditXS commercial debt collection service

How to Spot a Bad Debt Before it Happens


Warning Signs

You absolutely must try to avoid businesses going into administration while they owe you money. The process of administration is lengthy and you’re almost always at the back of the queue to get paid. Once the insolvency practitioner has taken their (very generous) fee, bank loans have been repaid and staff paid, there’s little or nothing left. You may have to wait years only to receive pennies in the pound.

With this in mind, it’s well worth keeping a close eye on your customers to see if you can spot any early signs of financial distress and act quickly to avoid getting caught.

Payments are Late Every Time

If a customer always pays late, it’s hard to know whether this is a sign that they’re in financial difficulty or whether it’s just a cynical financial policy to ’sweat the balance sheet’. In either case, it’s still good practice to strive to get the company to pay on time. The longer your invoices are beyond terms the more chance you have of being caught by a bad debt.

Escalate an Overdue Invoice

Distressed businesses tend to pay only those invoices they feel they have to. Materials and services that they absolutely need to keep your business going come first, then PAYE and payroll. Then whatever is left is used to pay off only those invoices that look most urgent. How do you get your invoice to the top of the pile?

If any of these warning signs apply to an invoice you have outstanding with a customer, it would be well worth considering involving a professional collection agency to bring it in quickly.

Why not try our simple, debt collection service, CreditXS. You can submit details of the debtor online at any time of day or night. There’s no minimum invoice value, and the fee only becomes due once the money is successfully received in your account. For overdue invoices, you can even add late payment interest and our fees to the debt, so the company you’re collecting from pays the cost.

If you just have one customer that routinely does this to you, why not use our CreditXS debt collection service (see box) for their invoice. If you submit it as it becomes due, the fee for collecting it is only 2%, and there’s no minimum value.

“I’m Waiting for a Customer to Pay Me”

This is a very common excuse, especially when you supply products or service that the customer then invoices someone else for. In their mind, they can’t pay you until their own customer has paid them. But if this really is the case then it is a significant warning sign that they are financially stretched, perhaps because they have taken a too-large contract or have general cash flow issues.

You should remind the customer that you don’t have a ‘pay when paid’ contract and act quickly to show them that you are taking the issue seriously.

“I can’t Afford to Pay”

Warning lights should be flashing and klaxons sounding if you hear this from a customer. They are obviously holding off creditors left and right and you need to escalate the situation quickly to make sure that when they have some money to pay, you’re at the top of the pile of urgent invoices. (See box)

Payment Performance Deteriorates

You get to know your customers. You know which ones pay on time every time, and if a pattern of late payment suddenly emerges for a business that previously paid quickly, it’s time to do your research. Try asking your contacts at the business if something is up. Look for news articles about the company (if it’s large enough to figure in the media) and run a credit check report on the business to see if there’s anything going on.

Mail is Returned

A letter returned in the post is a sign that things might have gone badly wrong at the company that owes you money, although it could just be that they’ve moved offices without a forwarding service. Check their website to see, or search the company at the London Gazette to look for a change of registered address or winding up petition.

Most of us invoice by email now, and often these services will continue to run automatically even after a company has switched off the lights and locked the doors. A returned mail with a ‘mailbox full’ message is a bad sign, although it could just mean that the person has left the company or gone on a long holiday. A returned message saying ‘nonexistent domain’ is also a bad sign as it could mean that the company has failed to pay web hosting fees to their service provider and been cut off.

Excuses, Excuses

The creativity of debtors in finding excuses to explain why they didn’t pay / can’t pay their overdue debts never fails to surprise us (see our article on excuses and how to deal with them). Clearly if the excuses just keep coming for a past-due invoice it’s time to escalate the process of collection.

Adverse News or Loss of a Major Customer

If you hear on the industry grapevine that a customer has lost one of their major contracts, or had some other major blow its time to start paying close attention to their invoices until you’re confident that their payment practices are unaffected.

Credit Reporting Services

Many of the credit checking agencies run a subscription model so that once you’ve run a report on a customer you receive email alerts to warn you of significant changes in their credit score. Remember that a credit score is only a ‘snapshot’ at one moment, and based on the information available at the time. Things change and it’s well worth subscribing to a service like this.


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