Bad debt – what this means for your business and how to handle it

Bad debt is one of those things that can keep small business owners up at night. You do the work, send the invoice and expect to be paid – but what happens when the money doesn’t appear in your bank account? If a customer can’t or won’t pay, it can put real strain on your cashflow, making it harder to pay suppliers, cover wages or invest in growth.

The good news? There are steps you can take to reduce your risk, recover some of the debt and protect your business in the future. Here’s what you need to know.

What is bad debt?

Bad debt is money owed to your business that you are unlikely to recover. It usually happens when a customer goes bust, runs out of cash or simply refuses to pay. If you’ve chased them with no success, at some point you have to accept that the debt won’t be paid and write it off in your accounts.

Why does bad debt happen?

Most bad debt happens because a customer is struggling financially. They may be waiting on payments themselves, dealing with supply chain issues or suffering from poor sales. Sometimes, businesses extend credit to customers who aren’t financially stable, which increases the risk. And in rare cases, bad debt comes from fraud – where someone had no intention of paying from the start.

How do you spot the warning signs?

A late payment here and there isn’t unusual, but if a customer regularly misses deadlines, stops replying to emails or asks for more time to pay, take note. These could be signs they’re struggling. Keep an eye on industry news too – if a big client is in trouble, you don’t want to be the last to know.

What does the latest bad debt data tell us?

The final quarter of last year saw a rise in business insolvencies, with a number of companies failing to pay suppliers before closing down. Some of these debts ran into tens of thousands of pounds, leaving small businesses out of pocket. This trend highlights why it’s so important to have solid credit control measures in place.

Can you reclaim tax on bad debts?

Yes, in some cases. If you’re VAT registered, you may be able to claim VAT relief on bad debts over six months old. It won’t get your full invoice paid, but it can soften the blow. Speak to your accountant to check if you qualify.

What should you do if a customer won’t pay?

• Follow up quickly – don’t wait and hope they’ll pay. A polite but firm reminder as soon as an invoice is overdue can go a long way.
• Offer a payment plan – if they’re struggling, they may be able to pay in instalments. Something is better than nothing.
• Send a formal letter – a well-worded demand letter can show you mean business and often prompts action.
• Use a debt collection agency – if all else fails, a professional debt collector may be able to recover what you’re owed.
• Consider legal action – taking a customer to court is a last resort, but if the debt is significant, it may be worth it.

How can you protect your business in the future?

Bad debt can’t always be avoided, but you can reduce your risk with good credit control practices:

• Check customers’ credit history before offering payment terms.
• Set clear payment terms and stick to them.
• Keep an eye on existing customers – just because they’ve paid on time before doesn’t mean they always will.
• Invoice promptly and follow up as soon as payments are late.
• Consider trade credit insurance – this can cover you if a customer goes bust.

At the end of the day, bad debt is frustrating, but it doesn’t have to break your business. The key is to stay on top of credit control, act fast when payments are overdue and have a plan in place to recover what you can. If you’re worried about a particular customer or want to tighten up your processes, now is the time to do it. A little preparation today could save you a big headache down the line.

Speak to Stef, Nilima or Will at Evolve Business Finance if you would like more information on trade credit insurance or need funding to plug a gap.