All business owners want to keep their customers happy. For some, that means offering excellent service and regular discounts, and for others, it means being open to credit purchases once in a while. These approaches are often effective, but opting for the latter means accepting the fact that not all debts will be paid on time, and some may not be paid at all.
Bad debts can be frustrating and hurtful to your business. But, whether or not you eventually collect the receivable, you will need to get that bad debt off your books sooner or later, even if it means writing it off.
What Does Writing Off A Debt Mean?
Writing off a debt means taking an unpaid receivable off your books because you’re unable to collect payment and have therefore stopped pursuing the debtor. The idea of the process is to accept the debt as a business loss and “pay it” on behalf of your customer so that you can balance your books.
Writing off can be the only option of getting a bad debt out of your books, especially if pursuing it would be even costlier than the debt itself. However, because writing off means giving up entirely, you should only do it when you’re certain that nothing can come out of pursuing the receivable.
Alternatives To Writing Off A Debt
Removing an unpaid receivable from the books is usually a painful process. Therefore, if a bad debt involves a substantial amount of money, make sure you’ve explored all your options before writing it off.
1. Demand Formally
If the payment is overdue and your client is not responding to your polite reminders, write a formal letter of demand. Your letter should be in a clear, firm tone, but should not contain words that put unnecessary pressure or threaten the debtor. Attach a copy of the invoice, payment options, banking details and other relevant business statements, along with a date, before which the client should have paid the debt.
Some clients tend to take debts lightly when they’re pursued in a friendly manner. A formal letter of demand is, therefore, an effective way of inducing a sense of urgency for payment.
2. Seek Negotiation
More often than not, customers fail to clear invoices in time because they’re unable to, not because they don’t want to pay. If your formal demand isn’t fulfilled, reach out to the client and inform them that you’re open to negotiating new terms of payment. If the negotiations are fruitful, the customer may agree to pay more money, either up-front or in installments, in return for more time. You may also want to draft and sign a contract, explicitly stipulating the terms of the agreement.
3. Take Legal Action
If all negotiations fail, then you can try taking legal action before opting to write off the debt. Building a case can be an intricate process, but the right commercial litigation lawyer will know the best steps to take, to ensure you recover the debt.
Unpaid receivables can have adverse effects on the operation of your business. Although a proper approach may get you your money, preventing bad debts is always better than trying to recover them.