Research from 2023 shows that around 82% of businesses have outstanding debts, with one in five writing off significant sums of bad debt rather than attempting to recover it. Even more worryingly, 40% of businesses say they do not even know the full value of monies owed them.
At a time when 55% of all the invoices issued in the US are paid late, simply writing off thousands of dollars in unpaid debt is putting businesses at risk of insolvency.
While, on some occasions, writing off bad debt is unavoidable, there are a range of other options you can take that can recover the money you owe, ensure your company retains its liquidity, and even reinforces your relationships with your clients.
The checklist below will take you through eight steps you should consider before writing off your revenue as bad debt. Your business deserves to get paid for its work, so before writing off bad debts in future, run through the checklist below to ensure you have tried absolutely everything to protect your business' income.
What are debt write-offs
Bad debt is any amount of money that a creditor needs to write off because of a default on the part of the customer. This default could be on a credit agreement or on an invoice for payment.
Having a contingency level of potential bad debt is part of estimating risk when you extend credit or offer services or products without an upfront payment. However, writing off all unpaid debt as bad debt is a recipe for crippling your cash flow and putting your business at risk.
There are multiple collection methods that can be pursued to ensure that you get paid without needing to write off invoices. Ensuring all collection efforts have been made before taking the decision to write off debt is the best method for keeping your cash flow stable.
1. Review your communication history
The first step in assessing whether any given debt needs to be written off is to review all of your communications history with the client in question. To make an informed decision, you need to understand the situation in detail and whether any opportunities to employee effective collection have been missed.
Review all communication logs for any missed responses or opportunities to resolve the situation. Did your customer offer part payment, did you offer them a payment plan. Sometimes responses get lost in the churn and a quick revision of your notes can resolve the situation without a write off.
If you do decide to pursue legal action or third-party debt collectors, having a consistent, clear, and documented record of your communications is a great tool for ensuring you remain compliant with the various laws and regulations governing the process.
2. Assess the debtor’s financial status
Up to date financial data on your debtor is critical to understanding their position and making the best decision for your company. Information on your customer’s solvency or bankruptcy status and how their financial circumstances have changed since the debt was incurred are vital to informing your next steps.
Credit checks are a simple and easy way to access this kind of financial information.
If the debtor has become insolvent, then a write off might be inevitable, but this depends on the exact nature of their bankruptcy. If they are still in business and show signs of financial recovery, then recovering the money owed is still a realistic proposition and you can choose the right recovery method, rather than writing the debt off.
3. Offer flexible payment plans
Once you’ve reviewed your existing interactions with your customer and gotten up to date information on their financial situation, communication is normally the best tool to resolve the situation.
Negotiating a payment plan or reduced payment with your customer can benefit both parties. Having information on their current financial situation helps you to understand what kind of flexible payment options are realistically going to work.
Installment plans or temporary payment deferrals can also give your customer the financial breathing space they need to make a full payment on their outstanding balance.
During the process, make sure that all communications are conducted in a calm and professional manner. If you can resolve the situation, then treating your customer with respect can help to ensure future repeat business.
4. Consider debt negotiation or settlement
In the same vein as offering flexible payment plans, choosing to conduct a debt negotiation and pursue a reduced settlement is a viable option. Rather than writing off the debt and losing the entire amount, you can a reduced settlement amount to the customer
Once again, knowledge of your customer’s financial situation is critical here, as it helps you to assess what level of reduced payment is realistic. Negotiating a settlement that provides some payment, rather than none, is a solution that benefits all parties.
During the process, remember to document all negotiation attempts and the debtor’s responses in case you choose to pursue legal action at a later stage.
5. Utilize third-party collection services
Third-party debt collection services have an undeserved reputation for aggressive tactics that impact your customer relationships. However, as with all aspects of credit control, professional debt collections have advanced significantly. Modern third-party debt collection services employ mediation and resolution to find the best solution for both parties.
If you don’t have the resources to pursue outstanding debts on, which tends to be especially true smaller businesses, then contracting a professional debt collector can be the best way to recover debts instead of just writing them off.
To ensure you are getting the best results from your third-party debt collector, make sure to follow up with them to ensure they are communicating with the debtor in a manner that reflects your business and that they have exhausted their strategies before you choose to move on to other options.
6. Seek legal advice
Most counties have legal avenues through which a creditor can recover debt from a debtor.
Small claims court is one of the most common civil law methods for resolving unpaid debts. If you do choose to pursue this method, the first step is always to consult legal counsel regarding the feasibility of pursuing legal action.
A qualified legal professional will be able to assess the feasibility of legal avenues for debt recovery, such as small claims court, and let you know what the next steps you should take are.
As always, document all legal consultations and advice received. If possible, it's also a good idea to provide your legal council with all prior communication you have had with your customer and any financial information you have been able to gather on them.
7. Review internal policies
Reviewing internal credit control policies before writing off debt services two processes. The first is ensuring that your decision to write off any debt aligns with your company’s internal policies and thresholds.
Ensuring that all internal procedures for debt collection have been followed means that you ensure compliance and protect your company from any potential litigation in the future.
The second reason to review internal policies is to incorporate any learnings from the situation. If you’ve come across any ways in which the situation could have been avoided, or collection methods that proved effective, adding these to your internal credit control policies can help to prevent bad debt write-offs in the future.
8. Simplify your debtor management with automation
Chaser’s award winning automated credit control platform offers you a wide range of options to recover debt, without needing to write it off. Employing automation and AI to reduce the amount of work your AR department needs to put into collections, Chaser also ensures that all documentation and communications are sent in a timely and error-free manner.
Overdue invoices and accounts can be escalated to Chaser's friendly collections team in just one click (as shown in the image below). View an instant, no-win-no-fee quote in your account when you start a free trial with Chaser.
All communications with your customers are also stored, so you can easily access and review them as part of the write-off or recovery process. Chaser offers a holistic approach to debt collection, with options for extending payment plans or referring the customer to Chaser’s expert debt collection service.
With Chaser, not only do you get paid on time more often, reducing your DSO by an average of 75%, but you can also save more than 15 hours per week that would be appended manually chasing late payment.
With built-in options for flexible payment plans, credit checking, and payment behavior monitoring, Chaser gives you all the tools you need to turn bad debt into recovered debt.
Stop writing off debt and start collecting it
Following the eight steps on this checklist before writing off any debt is the best way to ensure you’ve exhausted all your options before you mark any outstanding payments as unrecoverable.
It’s also an excellent way to review your current debt collection processes and make improvements as needed to avoid writing off debt in the future.
To find out how Chaser can make the entire process streamlined and easy, contact one of our experts to book a demo today or sign up for your no-obligation 14-day free trial today.
