Small Business Guides

10 ways to stay out of debt

7 min read

Bad debt and late payment can be problems for almost any business. What's the best way to handle them? Here we look at ten ways to stay out of debt and reduce the impact of debtors.

Stay in control of the money you're owed

Business owners often worry about payment. That's especially true in the early stages of running a new business, or when you're dependent on a small number of regular customers.

Debtors are people who owe your business money. As long as they pay promptly, there's no problem. Unfortunately, sooner or later almost every small business has to deal with late payers. The way you handle them can make the difference between being paid quickly and having to go to court to get your money.

Dealing with debtors can be stressful, because all sorts of questions may pop into your head:

  • What if they never pay?
  • What if my cash flow stops?
  • Will this cause me financial difficulties?
  • Will I have to cease trading?
  • What's the best way to make sure I get paid?

These are all valid questions. Fortunately there are tried and trusted ways of answering them. In this guide we'll look at ten simple ways to manage debtors. With this knowledge you can sleep well at night, knowing you've done everything possible to minimise the effect of debtors on your small business.

Make your terms clear from the start, in contracts with your customers and on your invoices.

10 top tips to manage debtors

Here are some ways to help you manage debtors effectively, so that they don't have a negative impact on your business and its finances.

  1. Check out potential clients before you work for them
    Do they have payment-related court judgements against them? These are often listed in the local press, and your council will have records of them too.

    Talk to members of business associations, your friends, business partners, suppliers and peers. Many businesses work within a small network of other businesses, so late payers are likely to be easily identified.

    If you do decide to work for companies with a record of late payment, at least you'll be aware of it. You can then take steps to prevent it becoming a problem for you. For example, you might insist on partial or full payment before you begin work and only take on small jobs.

  2. Define short payment terms
    If you've completed your work in a matter of days, why wait six weeks for payment? Make your terms clear from the start, in contracts with your customers and on your invoices. 14 days is common and even seven days is unlikely to be a problem for most well-run companies. You could always add a discount incentive if they pay on time.
  3. Keep track of the figures
    You can't chase debtors if you don't know who owes you money! If your accounts are currently kept on scraps of paper or in an old spreadsheet then it's time to upgrade.

    Get some good accounting software that you can access online. Make sure you keep it updated so you'll be able to tell at a glance who owes you money – and how much.

  4. Send prompt reminders
    It can help to send reminders to late payers as soon as invoices become due. Start by sending an email. If there's no response within two business days, follow up by phone. The best way to deal with a late payer is to prevent them becoming a late payer in the first place. Be proactive about this. Good accounting software will let you set up automated reminders that will take a lot of the effort out of the payment-chasing process.
  5. Payment is your right
    As a business owner, it's your right to receive payment for the work you do. This is called a moral right, but in most countries it's also a legal right. As long as you've fulfilled the agreed contract (which might be a verbal contract, not written down) you have the right to be paid on the agreed terms.

    The customer can't change the payment terms without your approval – they must pay when they agreed to pay. So don't feel shy, embarrassed or presumptuous when asking for your money. It's your money and you have the right to be paid.

  6. Record all communications
    You should do this anyway, but note the time and date of all phone calls with clients and what was discussed. Keep copies of emails, letters, text messages and any other form of communication.

    This will help you resolve disputes later if any occur and will also be useful if you have to go to court. At that point, the more information you can provide, the more likely it is that the court will make a fair judgement.

  7. Know your legal options
    When dealing with a persistent debtor, you should get in touch with your local business advice office or council. They'll be able to explain your legal options. These will vary from one jurisdiction to another, but are usually along the following lines:
    • If the amount owed is disputed, the debtor and the creditor (that's you) may be encouraged to attend a dispute resolution service. This means you'll be assigned a trained mediator who will listen to both sides of the argument and make recommendations. Usually the debtor and creditor will first be asked to sign an agreement that they'll abide by the mediator's decision.
    • If this doesn't work, your next option is likely to be a local court, such as a small claims court or district court. These will listen to cases where the money at stake is below a certain amount, though in some jurisdictions they won't deal with business debt. The outcome is legally binding.
    • If the amount of money owed is too high or the local court won't take your business case, you may have to apply to a larger court instead. This is likely to cost more.
    • Court cases can result in a recorded judgement against the debtor. That can affect their ability to borrow money or receive credit in future, so it's a strong deterrent. Many cases are settled before they reach court, once the debtor realises that the creditor is serious about the issue.
  8. Don't get personal
    Rudeness or insults will raise the stakes and make it emotionally harder for your debtor to pay. Be polite and firm – state the actions you're planning to take, clearly and without emotion. If necessary, take a day between drafting an email or letter and sending it. You will get better results by leaving emotion out of your communications.
  9. Ask for help
    Don't be afraid to ask for advice. Governments know that late payments can damage small businesses, so they try to find ways to prevent it from happening.

    There's lots of advice online about dealing with the specifics of bad debt, and most countries also have networks of business advisors who can act as mentors and help guide you through the process. It's important not to try to struggle through alone – take whatever help you can get.

  10. Follow the recommended process
    You will make things much worse by attempting to take matters into your own hands. Threats, intimidation and other emotional behaviour are not only illegal – they will make the situation worse for you. Stay on the right side of the law, stay calm and follow the legal process.

You are not alone

It might seem like the end of the world when you first realise that you have a late-paying client. But you're not the first business owner to experience this, and you won't be the last.

Dealing with debtors is part of running a small business. Obviously it's not a fun part, but it's necessary if you want your business to grow.

So don't let your debtors become a problem. By taking note of the steps we've described in this guide, you'll be able to manage your debtors rationally and effectively.