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October 15, 2023 Commercial Debt

Strategies for Preventing Bad Debt in Business Transactions

New Jersey businesses often give up on pursuing their debtors. Sometimes, these debts are simply beyond reach and it becomes clear that the outstanding balances will never be paid. A business may come to this conclusion for several reasons. Perhaps they believe that the cost of pursuing the debt is higher than the actual sum itself. They might also realize that the debtor is now bankrupt, deceased, or otherwise incapable of paying. 

Regardless of the circumstances, this situation should obviously be avoided at all costs. Unpaid invoices can cause serious issues for businesses, and they even have the potential to shut down viable businesses. A number of strategies can help businesses avoid bad debt. To learn more about these strategies, be sure to speak with New Jersey debt collection lawyers. 

What is Bad Debt in Business?

“Bad debt” may have various meanings depending on the context. For the average person, “bad debt” is generally contrasted with “good debt.” This distinction mainly involves the difference between debt that is beneficial long-term and debt associated with rapidly depreciating assets. For example, a mortgage is considered “good debt” because the value of the property (hopefully) goes up with time and provides utility. In contrast, a car loan is often considered “bad debt” because the vehicle depreciates in value as soon as you drive it off the lot. 

In the business world, “bad debt” has a completely different meaning. For a New Jersey business, bad debt is an amount owing that cannot be collected. Businesses might try various collections strategies before accepting that the outstanding balance is bad debt. When a company identifies a sum as bad debt, it must write it off as a loss. This poses obvious cash flow problems and additional accounting issues. 

The Statistics Surrounding Bad Debt

To understand the importance of avoiding bad debt, businesses should consider various statistics on this subject:

  • Bad debt write-offs increased by over 25% from 2019 to 2020
  • On average, companies write off almost 2% of all receivables as bad debt
  • By the end of 2020, total outstanding debt for US nonfinancial businesses reached $17.7 trillion

Small businesses may be especially vulnerable to bad debt. This is because major corporations tend to receive bailouts from the government when they get into serious debt, while small businesses do not enjoy such preferential treatment from the state. This is especially true with financial institutions such as banks, which also enjoy certain protections via insurance. 

Business Strategies for Preventing Bad Debt

Here are a number of strategies that may prove effective in preventing bad debt:

  • Personal Guarantees: A personal guarantee on a business loan or similar translation may allow you to go after a debtor’s personal assets rather than their business assets. This is effective because a corporation allows someone to declare bankruptcy in order to avoid ever paying the outstanding balance. A personal guarantee, however, holds them personally accountable. 
  • Liens: Another option might be to place a lien on property owned by the delinquent business or customer. For example, a plumbing company may provide services to a homeowner. If the homeowner refuses to pay, the company can place a lien on the home. This means that if the homeowner decides to sell the property, the plumbing company can receive the amount owed directly from the sale price. 
  • Effective Collections Strategies: It is best to avoid bad debt in the first place with effective collection strategies. This might include researching the debtor, following up regularly, offering payment options, and much more. 
  • Digital Solutions: Companies might also choose to invest in digital solutions to streamline invoicing, payment reminders, balance tracking, and much more. Numerous apps have popped up within the past few years that are affordable, easy to use, and accessible 
  • Litigation: If all else fails, you can get help from New Jersey collections lawyers and use litigation strategies to recover the unpaid sums. 

Strategies that Businesses Should Avoid

There are a number of strategies that businesses should avoid when attempting to prevent bad debt. The most obvious example is breaking the law in some way. Using aggressive or threatening tactics to recover the debt will only result in further legal and financial penalties for your business. On the other side of the equation, an equally bad strategy is to give debtors too much leniency. “Being nice” does not encourage debtors to pay you back – in fact, it can do the opposite. 

Book a Consultation With Collection Lawyers in New Jersey Today

If you have been searching for an experienced NJ collections attorney, look no further than Snellings Law, LLC. Over the years, we have helped businesses in the Garden State with numerous issues, including the seizure of property for debt, commercial collections, bad check laws, lien releases for construction, personal guarantees on business loans, and much more. Reach out today to get started with effective collections strategies and avoid ever encountering bad debt. Remember, bad debt has the potential to bankrupt your business in a relatively short period of time if you are not careful. Book your consultation today to get started with effective strategies.