When Good Commercial Debt, Turns Bad

Managing your finances on a day-to-day basis in business is an integral part of managing your businesses effectively, overall.

But this becomes of even greater import when the element of managing debtors comes into play. In life, as in business, credit is king it seems, and these days it’s seemingly becoming an ever greater part of doing business – not less.

So how do you effectively manage your debtors and accounts while maintaining good relations with your partners, suppliers, and clients?

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Firstly, it’s probably a good idea to add commercial debt collections to the list of outsourced services that your business should consider. We say this because the amount of time and resources that you have to dedicate to pursue overdue or bad accounts and debt could very quickly surpass the amount of the debt you’re pursuing. 

Debt collection companies that specialize in commercial collections, work for several businesses and companies and this is their sole business function. That means that the cost of pursuing these bad debts is effectively split between all of the clients who are making use of this service, thereby making it more cost-effective for you.

But, let’s take it back a step or two. When does good debt, become bad?

Let’s start with a couple of definitions:

Good debt is generally defined as money owed for things that can help build wealth or increase income over time. So, if you’ve extended credit to your partners so that they can take on larger orders to service a growing market on their end, this is good debt for you, as it means that you have a larger dollar sales amount that’s potentially coming into your business. 

Bad debt, on the other hand, is when the initial terms of your credit have not been met and as a result, this is now placing pressure on your cash flow, and may even result in charges levied against you by your bankers or your service providers in turn.

This is where things could become a little more complicated for you because while you need to pursue outstanding and overdue accounts, you also have to be delicate in how you deal with your partners when they’re experiencing difficulties – this may well be you in the future.

But, there does come a point where negotiations and goodwill options are exhausted and it’s necessary to follow a more aggressive stance.

COMMUNICATION

In any event, managing debt from your partners or clients starts with effective communication. It is seldom a good idea to hand them over to collections attorneys from the word go. The problems they’re facing may be temporary and may well correct themselves in the short term, your largesse and understanding go a long way to building loyalty.

NEGOTIATE

There are always better ways to handle overdue accounts than legal prosecution as a first port of call. Negotiate with your debtors, refinance the debt if it’s large enough and viable to do so, or look at restructuring financial agreements in ways that can preserve the relationship while still allowing for business to continue.

There are many good reasons to manage commercial debt, not just what is owed to you, but what you owe to your partners, and learning how to reduce that debt on both ends is beneficial for everyone.