Bad business debts are the bane of many companies’ existence, lingering on your books indefinitely while you wait for a payment that might seem like it is never coming.
This leaves you to face the decision of whether to continue waiting or to write off the debt and concede that you are never going to get the money.
In practice there are other options, such as appointing a debt collector to chase the payment for you, selling the debt to an invoice financing company, or in extreme cases petitioning for the debtor to be declared insolvent.
Can you write off bad business debts?
In extreme cases, where you are certain you will not receive what you are owed, it is possible to write off bad business debts – and figures from Company Check, a searchable online archive of Companies House records, show that over half of UK businesses have written off bad debts in the past.
The survey of 500 firms found nearly seven in ten had confronted late payments, yet only 36% were insured against bad debts, and fewer than two-thirds had any form of credit insurance in place.
The Federation of Small Businesses reviewed the figures and development manager Natalie Gasson said: “This is as much a policy issue as it is a cultural problem within UK business. Small firms need the confidence to charge interest and complain about late payments.
“The fear among the smallest companies, particularly when dealing with larger firms, is that complaining about a late payment could result in lost future work which will harm cash flow for their business.”
Common reasons why bad business debt is written off
There are many reasons why bad business debts get written off, ranging from reputational risks to simply wanting to cut your admin burden.
Small firms, as mentioned by Ms Gasson above, sometimes waive outstanding payments because they don’t want to be blacklisted by customers with poor payment discipline – although you have to question the sensibility of working with such clients anyway.
Micro-businesses and sole traders may decide to stop chasing payment on a particular invoice just because it doesn’t feel worth the time or effort.
And sometimes wiping bad debts off the books can come into your year-end accounting, if you prefer to start the new financial year with a clean slate.
But whether it is a decision of procedure or of convenience, there are powerful arguments against writing off bad business debts, as we will see below.
Why you should think twice about writing off bad business debt
Money is the lifeblood of any business – especially small firms which are less able to absorb financial shocks – and for the vast majority of companies, it is the reason to exist in the first place.
When you write off bad business debts, you cut off a limb to cure an itch, effectively removing any remaining possibility of getting paid what you are owed, and letting the debtor off the hook.
Although in some cases – such as if the debtor has ceased trading completely – it may not be possible to recover the debt, in many other situations you can claim not only what you are owed, but interest and penalties on top.
This means firms with substantial bad debts outstanding can actually be sitting on a gold mine, if you are just able to recover the money in the appropriate way.
FAQs about bad business debts
As always, there are a few of the same questions that come up again and again, so here’s a snapshot of some of the most common enquiries we receive.
#1 How much does it cost to chase a bad debt?
Historically debt recovery companies would typically charge a percentage of the amount to be recovered, often on a no-win, no-fee basis, but times have changed.
These days it’s permitted to reclaim reasonable debt recovery fees from the debtor, on top of the original amount owed, plus any interest and fixed penalties.
As such, you should not end up out of pocket for commencing debt recovery proceedings – and when you work with a reputable debt collection firm, you should always end up with more in the bank than if you had simply written off the debt.
#2 What interest and fees can I charge?
Statutory interest on overdue payments can be charged at the Bank of England base rate plus 8%, which is generally a very strong rate of return compared with any form of savings and investments.
There’s a fixed penalty of £40 on debts up to £1,000; £70 on debts up to £10,000; and £100 on debts of £10,000 and above.
And if your debt recovery costs exceed these amounts, you can also legally ask the debtor to pay the remainder, so that once your debt collector’s fees are paid, you are left with the original invoice amount plus statutory interest.
#3 What is invoice financing?
Invoice financing – also known as factoring or debt factoring – involves ‘selling’ the value of your invoices to a third party, who will then recover the amount owed for themselves.
You may be able to sell off bad debts in this way for a third party to chase, but you will usually lose a percentage of their value.
Bearing in mind that you can add interest and fees to the money you recover yourself, and compared with paying a percentage fee to sell off the debt, this can add up to quite a difference depending on which method you use to tackle bad business debts.
#4 How can I prevent bad business debts in future?
Good credit control is key to preventing bad business debts. Background credit check new customers so you know how much you can trust them to pay and make sure you issue your payment terms and conditions up front so they’re binding from the outset.
Make sure to invoice for work done as soon as it’s reasonable to do so, get all the information on your invoices correct, and state a clear total amount owed and payment deadline.
Be firm on overdue payments – you don’t have to charge interest and fees on payments made a day or two late, or by clients who are usually reliable, but it’s good to at least send out a firm but fair reminder.
Ultimately the aim is to encourage all customers to pay promptly, whether they are a long-term trusted client or a first-timer setting up a new account; by keeping on top of your credit control across the board, you reduce the risk of overdue invoices turning into bad business debts.