How to spot a bad debt before it happens

One of the biggest killers of a business’s time and resources is the chasing of debts, especially when the customer who owes them hasn’t got the means to pay. This is extremely frustrating, especially when you believe that they are willing to pay and capable of doing so.

With this in mind, you should do what you can to spot potential bad debts before you incur them and suffer their negative effects. It’s easier to see it coming with new customers than it is with old customers, and you might be more comfortable refusing to deal with new customers than those with which you already have a good relationship that you don’t wish to damage. Your first loyalty is your business’s general and financial wellbeing, but you should always try to keep conversations amicable.

Research new customers

One of the easiest ways to spot a bad debt before it happens is to check the financial state of any new company you might do business with before proceeding with the transaction. If it looks as though you might struggle to secure payment for whatever you supply, there is no reason you should continue dealing with them. As noted above, it is easier to take this course of action when you haven’t got a previous relationship with them.

There are several ways you can look into a company you’re not familiar with:

  • Run a credit check on the company using Creditsafe, D&B, Experian, Equifax, Graydon or another checking service to find out how likely it is that they will pay on time.
  • Put its name through the Companies House checker online – among other things, you can see whether it met the deadline for filing statutory information (demonstrating a good grasp of paperwork and compliance) and if there are any insolvency proceedings against it.
  • Find out if any of your contacts have had dealings with it in the past. What was it like to deal with? Did it pay promptly? Were there any communication issues? If any red flags show, consider whether you want to go ahead with the business transaction.

Spot warning signs

Other warning signs could show a financial issue with a client that you can take steps to avoid impacting on you. While not directly relevant to your dealings with them, it’s important to watch any public developments that could affect your shared situation. A recent County Court Judgment (CCJ) may suggest a cash flow problem; multiple CCJs would be even more worrying – see Registry Trust online for details. Credit reports will show if one or more directors have recently resigned from the business.

Undeliverable letters

One warning sign may involve letters being returned undelivered, though this could show that the company has simply moved premises without providing a forwarding address for post. Check their website or their entry on Companies House to confirm any change of address – if there is no discernible change, you may need to involve a tracing service to locate the business.

Industry news

Although this might only be relevant to bigger buyers, you may occasionally hear about the misfortunes of a company you have dealt with that could have a knock-on effect with regard to their ability to pay. If they have lost a major contract or one of their own clients has left them, this could result in them suffering cash flow problems and becoming unable to fulfil their payment commitments to you.


If a company with whom you’ve not had any issues in terms of payment suddenly begins making excuses and failing to pay on time, this suggests they are experiencing (either short or long-term) financial difficulty. In cases like these, you should find out exactly what their financial problems are and whether a resolution is achievable. If it sounds like a temporary blip, you may choose to extend credit to them as a one-off.

You may not always be able to spot a bad debt before it happens, but if you stay vigilant and alert to any warning signs (particularly with regard to customers you don’t already know), you could save your company a lot of the time and cost associated with chasing late payments.