What is bad debt?

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April 19, 2023

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Bad debt in the business context

We feel that there is a definite distinction to be made between an unpaid invoice and a bad debt.  Obviously an unpaid invoice can lead to a bad debt if it is not adequately managed.  Late payment of invoices is becoming an increasing problem for businesses as customers manage their cashflow in our challenging economic environment.  If these invoices remain unpaid, they could lead to a situation where the invoice amount becomes a bad debt.

So what is a bad debt?

In our view, a bad debt is an invoice where the customer has decided for whatever reason that they aren’t going to pay.  Often this could be because the customer and the supplier are in dispute over the services / products that have been provided.  Other reasons may be that the customer had previous cashflow problems and now that has resulted in them ceasing trading.  Business failures are on the increase, therefore the prevalence of bad debt is also on the increase.  More and more companies are in the position where they gradually drift from paying invoices late to a point where they cannot pay at all.

The importance of credit management

Taking into account the economic situation and the prevalence of business failures, it is now more important than ever to prevent a bad debt scenario.  Managing late payments can significantly reduce the amount of bad debt.  If you actively manage unpaid invoice collection, you can prevent the scenario when the situation deteriorates to a point where the customer simply cannot pay.  Our focus is on not letting a late payment become a bad debt.  It sounds simple but the priority is on active credit management so that you can limit the risk exposure.

How do we prevent bad debt?

At the Late Payment Service we have a proven process for invoice settlement.  This process is designed to be legally compliant and non-threatening but it is also designed to encourage prompt payment.  We are often asked, when should we use your services?  We usually say that if an invoice is 30 days or more overdue, then there is a likelihood that it could become a bad debt.  That said; we actively encourage our customers to appoint us as their ‘appointed representative’ on the collection of the unpaid invoice amount.  We obtain settlement of over 60% of the unpaid invoices that are given to us to collect.

How to deal with a bad debt scenario?

  1. Appoint a credit control / management company like ourselves to collect the unpaid invoice amount that is owed to you.
  2. If that is not successful, review your options e.g.
    • Action via the litigation route (of course this is more complex and often expensive)
    • Accept the bad debt has happened and ensure that your accounts reflect this

The key here is to act swiftly to avoid having to either litigate or accept the debt status. We suggest that you actively chase the unpaid invoice and ensure that you follow legal best practice.  This is where the Late Payment Service can help.

If you would like to know more, contact us or request a call back.

Author: Late Payment Service Team 2023.