Help Protect Your Business from Bad Debt

When a client fails to pay an invoice, many businesses aren’t left with a lot of options to collect what they’re owed. Suing a dishonest customer can be expensive, and business owners may not want to attract the attention and reputation that can come with a contentious lawsuit. Too often, companies find themselves with bad business debt that they don’t expect to recover. Freeloading customers can leave financial damage and broken trust in their wake – companies must do everything possible to protect themselves from bad debt. A proactive approach to evaluating new customers and monitoring existing partners can help businesses mitigate the risk of non-payment. The infographic below is meant to help business owners understand the threat posed by bad debt and the steps they can take to reduce the likelihood they’ll be left with unpaid invoices.

What Is Bad Business Debt?

Bad business debt is created when a customer fails to pay for goods or services. For example, if a construction company does work for a client, but the client never pays their invoice, the construction company can be left holding bad business debt.

How Can a Business Recover Bad Business Debt?

Unfortunately, dealing with bad debt can be difficult. Businesses can pursue a debtor in court, but this may not make economic sense. Once the job is completed or services have been rendered, there aren’t many options to ensure that a business gets paid.

Can I Write Off Bad Business Debt at Tax Time?

Yes and no. Here’s why it’s complicated:

  • If you operate on cash-based accounting, you cannot deduct unpaid invoices as bad debt.
  • In many cases, if you operate on accrual-based accounting, you may be able to deduct unpaid invoices once they have become uncollectible, which generally isn’t decided until the end of the year.
  • Most self-employed service providers can’t deduct bad business debts. According to the Bureau of Labor Statistics, this applies to 1 out of 9 American workers.
  • In order to successfully write off unpaid receivables, you’ll need to have proper documentation. Consult a tax professional to help you navigate bad debt write-offs.

Avoiding bad debt altogether is obviously the best option. Luckily, there are tools available to help businesses identify high-risk customers.

How to Help Prevent Bad Business Debt

Reviewing a business’s credit file can help you understand how that company has conducted itself in the past. Other vendors may have reported late payments or unpaid debts – a strong indication that a customer may not be a reliable partner. In addition, you can review legal judgments, outstanding liens, and other relevant information from public records.

Monitoring an existing client’s business credit scores and ratings can alert you to signs of financial stress. No one knows exactly what will happen in the future, but business credit monitoring tools are an essential part of financial risk mitigation.

Predictive analytics programs can even help decision makers set credit limits that match their appetite for risk. Such insights may help avoid cash-flow issues in the future.

How Can Dun & Bradstreet Help My Company Avoid Bad Business Debt?

With D&B Credit Reporter, you can continually monitor another company’s business credit scores and ratings for signs of financial trouble. Business owners are better able to anticipate a heightened risk of bad debts when this information is readily available to them.

To learn more about how Dun & Bradstreet can help your business avoid bad debt, call a Credit Advisor at 1-800-701-7168.

Photo Credit: denverurbanreview, Twenty20