Trade credit is an essential part of doing business in the modern age. When buying equipment in bulk quantities, your company will need to take credit from supplies. Similarly, customers might ask if you give trade credit before making a decision about whether or not to buy from you. Simply put, every other company nowadays deals on trade credit. The entire system of accounting in the modern age follows the accruals basis, which does not take into account money that is transferred, but rather payments and receivables that have been accrued.
However, trade credit also gives rise to bad debts. A bad debt is basically a bad debt that cannot be realised. For example, if you sold a considerable amount of product to a particular client, that client will be listed as a debtor to your company. The sale you made will be listed down as an accounts receivable and will be shown in the financial statements prepared by your company. But what if for one reason or another, the company is unable to pay off its debts? What if the company goes into liquidation and is unable to clear your dues? As a business owner, you need to protect your company against the threat of bad debts. Here are some simple techniques to protect your company against bad debts.
Companies such as Niche Trade Credit offer fantastic credit insurance policies that are tailor-made for their customers. If you want to protect yourself against the very real threat of bad debts, purchasing a trade credit policy is a good idea. Basically, the insurance policy provides cover against the threat of bad debts. This means that in the event that a customer defaults on their payments, the insurance company will be responsible for covering the debt. Purchasing a trade credit insurance policy is not as easy as you might think, as the terms and conditions offered by different companies vary based on a variety of factors. However, if you are interested in getting a policy, it’s recommended that you ask for quotes from various insurance policies. Never rush into making a decision; always take your time and compare quotes from numerous insurance companies before you finalise your decision.
Create a Recovery Division
You should also set limits on the maximum amount of credit that you can give to any company. Then, create a recovery division that is responsible for following up with clients and recovering the money that your business is owed. You need to make sure that payments are tracked and recovered on time. If certain clients fail to pay on time, you might want to stop extending credit to them altogether. It’s highly recommended that you maintain a list of all clients that have a history of not paying on time and avoid providing them with credit again. These are just a few things that you should know about how to minimise your risk of bad debts.