How to prevent a bad commercial debt

Background research on your potential debtor

Before you give credit, it is a good idea to do some background research on the individual or company in question:

• You should ensure that you obtain sufficient information from the proposed debtor, as well as from credit checks and company searches, to identify whether they are creditworthy.
• You should ensure that you have systems in place for monitoring and pursuing bad debt.
• Make sure you address any potential problems with debtors in your terms of trade (see How to draft terms of trade) and ensure the debtor signs and understands them.

Keep good records

It is important to keep accurate and detailed records of all your contact with the debtor.

The symptoms of indebtedness

Watch for "the symptoms of indebtedness" and anticipate the need for action. These symptoms include:

• the debtor failing to pay by the due date
• diminishing communication between the debtor and you
• increasingly implausible excuses
• proposals for restructuring the debt
• signs of poor organisational and/or financial management

What should I do when the account becomes overdue?

You should act quickly and firmly when the account becomes overdue. Start first with a warning, and if not satisfied take action (see below).

How do I go about recovering the debt?

For information on recovering debts, see How to recover a debt from a company and How to recover a debt from an individual.

Cautionary notes

• Always be aware of commercial realities: the debtor may simply not be able to pay the debt. Consider this before you begin expensive legal proceedings. You should seek legal advice to assess your chances of recovering the debt.