Two focuses of my blog are Financial Literacy/Money and Business/Entrepreneurship. In some instances running a business involves using debt. The key is to do so in a controlled way so that your operations can thrive and not falter. The following contributed post is entitled, How To Start A Business And Avoid Bad Debt.
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Bad debt can drive a business into the ground, and while it might be avoidable in the beginning, it can catch up on you quickly unless you run a tight ship. In this article, you can find some of the best strategies for avoiding bad debt in your business and growing it in the right direction.
Customer Relationships
When you are starting a company, you might be in the market for customers of any kind, but not all customers are valuable. Some of the customers you onboard will be bad for the business; they will buy products and services and return bad debt for the business by using their credit.
The best way to start a business and avoid this type of customer is to screen your customers and build last8ing relationships. The more trustworthy your customers are, the less likely they are to default and leave you with a faulty balance sheet; it pays to know your customers better.
Up Front Payments
If you want to avoid bad debt, then avoid customer credit. It’s a simple solution, but it’s not simple to implement. Of course, it’s better to receive cash that can move through the business accounts right away, but customers nowadays are more comfortable with their credit cards.
If you suspect the cash flow in your business is vulnerable, then insist on debt cards or cash. For the most part, credit cards are fine, but there’s a higher chance of defaulting in the worst case, and it might take longer for the cash to register in the business. Ask for upfront payments.
Credit Limits
If you offer credit limits to customers, keep them low until you understand more about their creditworthiness. Credit limits are useful for some businesses, especially ones that sell expensive products that customers prefer to pay using manageable installments but play safe.
Once you have established the fact that your customer is reliable and trustworthy, you can increase their credit limit; understand your customers better using a customer relationship management tool to track your interactions with them. These interactions help build trust.
Payment Terms
If your customers are late with their payments, it has a knock-on effect on your business; in the best case, it affects your cash flow, but in the worst case, it impacts the credit of your business, leading to hard money loans; these are ideal for companies with debt management issues.
Still, it’s sensible to state the terms and conditions of repayment in your agreement to ensure there are no miscommunications in your process management. If there are any issues with repayment, you have a legally binding document that can be used to reclaim the owed amount.
Better Accounting
When you are focused on running and growing a small business, it can be hard to keep on top of all the customer’s payment processes, but that is also central to running a successful business operation. The best solution is to invest in accounting – outsource this if necessary – to ensure that your customers are fulfilling contracts and bringing correct money into the business.
