What is Bad Debt? Across the UK and across the world for that matter, people are looking to borrow, finance or charge products and services.
The influence of the global economy has the potential of turning a local bad debt into a world-wide issue. The flow of money is no longer tied to just one nation.
Foreign investing has become a popular method for other countries to expand business markets. The result is that local businesses and individuals with outstanding debt may be closely tied to events over seas then to events here at home.Bad debt is debt that has gone unpaid and the circumstances that create bad debt are very numerous today.
Prevention is The Better Cure
There is always the adage that prevention is perhaps the best cure. That is certainly true when it comes to debt. Pre-screening borrowers is still one of the best methods of preventing bad debt.
Prevention efforts should go beyond looking at a perspective borrowers credit history. With the economy slowing and jobless rates rising, lenders should look at a borrowers job title and function before extending credit or financing.
In the case of businesses looking to borrow funding, the industry should be reviewed prior to lending. This is an idea that is somewhat outside of traditional lending practices. The difference is the state of the economy and the influence of foreign investment. This can also be seen in how currency is now tied to the world economy.
Companies that in the practice of lending money or extending credit to others should realize that the longer bad debt ages the less likely it is to be recovered. Be proactive in collection activities.
Companies who collect bad debt should have clear and precise time lines in place so that when debt ages to a certain point a specific action is taken. Sometimes the legal course of action is the most beneficial for collecting bad debt.
Bad debt that is not collectable
A percentage of all bad debt is not recoverable. In today’s economy, debt that is not recoverable may have a higher percentage rate than it was ten years ago. Methods and tactics that worked to collect bad debt a decade back may not work at all today.
A well rounded company, that practices debt collection or even companies lend money and that have an in-house debt collection, should also have a team of people who understand how to manage bad debt that is not collectable.
This may mean weighing the benefits of writing off bad debt or selling it to third party collection agencies. The goal would be to find solutions that best benefit the lender. This may mean using tax accountants or lawyers who have the expertise to provide solid counsel.
Consideration to recovering some of the bad debt through alternative methods may also be a feasible option. This may mean taking advantage of tax incentives or write offs, placing liens against assets, or selling the bad debt to other collection firms.
Lending money, credit or providing financing in today’s economy is a risk. Understanding how prevention can lower the risk that is involved can be a good first step in helping to manage bad debt.
Defining bad debt through company policy is another way to help manage bad debt. Knowing how to handle collection efforts when debt has become a bad investment can be achieved by issuing clear time line strategies for aging debt.
Also, making a point of knowing what the benefits to the business are can help lenders discharge bad debt and still recover a portion of the outstanding debt. This may be seen as a tax write off or as a smaller loss if the bad debt is sold to a third-party collector.