Bad debt can be a major problem for any business if it isn’t handled properly. Both Bear Stearns and Lehman Brothers ended up in financial turmoil because they had to write off so much bad debt. Bad debt can take its toll on your company’s financial stability and reputation. It can even make it nearly impossible to get financed by any bank.
Many companies have gone bankrupt because of bad debt. It can stem from a company that isn’t properly run or from a bad economy. No matter where it comes from, companies need to deal with bad debt before they have to file for bankruptcy.
It’s more difficult to collect on a debt the longer you let it go. If your company has debts that are more than a year old, you can turn to a collection company, but the chances of getting the money is minimal. It’s best to hire a collection company after 60 or 90 days, before the debt becomes seriously overdue and your chances of collecting on it become impossible. No company is immune to having bad debts or customers who have to file for bankruptcy.
A history of customers who cannot pay you can keep you from getting credit from suppliers and vendors. This will hurt your business in the long run because you won’t have a product to sell. Most businesses use credit to purchase products because very little cash changes hands these days. If you can’t get credit from your suppliers, you have nothing to sell and your business will fail.
Bad debt will ultimately hurt your workers as well. Your company will not be able to afford to offer health insurance or give raises to your employees, which can potentially cause your employees to look elsewhere for an employer who can offer them these things. When you lose your employees, it’s nearly impossible to recover from that, especially if they have worked for you for many years. It will cost more in the long run to hire and train new employees.
Keeping track of debt and not letting it get out of hand will keep your business running smoothly. Don’t let it turn into something you can’t control. If you begin to see issues with customers, you can take care of it right away, before it becomes a problem. Debt is a part of business, but bad debt doesn’t have to be.
Contact an accounting professional for help in dealing with bad debt.