How To Avoid Bad Debts In Business: Your Trusted Guide

How To Avoid Bad Debts In Business: Your Trusted Guide

avoid bad debts in business

Your ability to identify and avoid bad debts in business can help you avoid bankruptcy in your business as an entrepreneur. In business, it is always disturbing to get new customers, supply your products, and then not getting paid. You must not take bad debts in business likely because they can run your business to the ground. For your business to survive, cash flow must be well taken care of. In today’s business environment, ensuring your business is free from bad debts can be the difference between and failure. 

Also related: How to avoid bankruptcy in business

The aim of this article is to provide you with internal control measures to minimize or avoid bad debts in business. 

Tips On How To Avoid Bad Debts In Business 

  •       Develop a credit application

You can learn from the banks and create information about your customers using a credit application. It might be a one-page document about your customers to help you investigate their credit. For most companies and startups, they make use of the 2-page application to enable them to create legal terms with their customers. The form is designed to protect the vendor in case there are payment issues. You can get templates of credit applications online to guide you in creating yours. 

  •       Investigate the creditworthiness of your customers

You can run a business credit report on your customers to help you determine their behavior with money. You need to determine if they have tax liens or a history of paying late for services rendered. Different platforms can help you carry out this report on your customers. The amount you will spend on this report is nothing compared to what you will lose to bad debts. Listen, do everything within your means to avoid bad debts in business. 

  •       Have good records of all your transactions

You need to record every business transaction with your customers using their verified and official names. In your file, you must have the product prices, quantity sold, delivery dates, and payment terms and conditions. Verbal orders create loopholes for bad debts that can hurt your business. You must always have your proof of product and service delivery until you have received the payment. 

  •       Once invoices are 75 days past the due date, take decisive action

Once there is a dispute, you must make the resolution top priority because the more it lingers, the more difficult it will be to settle. If the problem is on the cash flow, you need to get enough information from your customers so that you can make an informed decision. You must have it at the back of your mind that once your invoice is 90 days past due, there is a 26% chance it won’t be collected. At this point, you can engage the services of a reputable collection agency to help with the situation at hand. If you intend to avoid bad debts in business, then you must ensure your invoice is available as at when due. 

  •       Create clear terms and conditions 

An excellent internal measure to minimize or avoid bad debts in business is to create clear terms and conditions.

Regarding credit agreements, you need to set clear terms and conditions. The terms and conditions will go a long way to protect you and your business if things fail to go according to plan, and you needed to take legal action against the customer. Make sure that any terms and conditions are duly signed by the person responsible for the payment of accounts like your financial director or manager with authority. As the startup founder or owner of the business, you can also be the signatory to the terms and conditions. 

Also read: How to build a business from scratch

In your terms and conditions document, the time frame for the payment to be received should be clearly stated. You can also detail the consequences of defaulting on the agreement. At all costs, always stick to your terms no matter the condition. 

  •       Have a specified credit limit

Without a credit limit in your business, you risk going bankrupt due to the accumulation of bad debts. You need to set a credit limit that your business can bear. Better to ask a customer to pay for the new balance in advance, that exceeding your credit limit. Don’t risk more than what your business can bear. 

  •       Carefully select your clients 

This might sound crazy or off, but you must not do business with every client. There are certain clients that leach and can run your business to the ground. You can work with your sales and marketing department to create the profile of your desired client. Once you have identified your target clients, it will be easier for you to conduct credit reports and searches on them. 


No matter what you do in your business, do everything within your power and means to avoid bad debts in business. In this article, I have listed significant internal measures to minimize bad debt in your business. It is left for you to put these essential measures into action as they will be very indispensable to the survival of your business. Bad debts are the precursor of bankruptcy in business, so you must do all you can to nip it in the bud. 

I would love to get your thoughts on this topic, so for your contributions, kindly make use of the comment box provided below. 




Leave a Reply