Financial Protection

I've been in a lot of positions where I have been vulnerable to financial loss. Credit customers not paying me has cost me greatly. So below I'm going to give a few tips to protecting yourself against bad debt. This maybe isn't for everyone, its more aimed at B2B readers, but supplier of sole traders may benefit from it too in the future. If I had known half of these things existed years ago, I would be in a much stronger financial position now.

I work in the aviation industry, and in the passed two years I've lost more than $400,000 through not knowing anything about the below. When you're working with 20% margin, that's a lot of cold hard earned cash to compute losing. On a personal note, it really messed up my focus. I became so stressed and upon reflection I did not handle it well, I lost sleep worrying about paying staff, bills, etc. I lost more than that not knowing how to talk about it & just became a severely stressed person.

The first two methods are suitable for trading with international customers & trade customers. The last may be more advisable to only use in the UK jurisdictional area, if that is where your business is based,

Credit Risk Insurance - This is brilliant - search online for it, its possibly one of the cheapest methods I've found to protect against bad debt.

If you supply goods/services to other companies or sole traders, the likelihood that eventually the customer will want 30 day credit terms is quite high. Most businesses want to have a good cash flow & the often want time to receive, process & sell/use the goods before they pay you.

If you find yourself a good credit risk insurance company or broker, they will do the following things. Firstly, they perform their own financial checks on the company who is asking you for credit & provide you with a safe amount that the customer can be credited for. They will review your sales agreements & tell you if they are robust or not (they may even provide you with an outline document that is safe to use). In the event a customer forfeits on the sales contract, and you have to claim, most credit risk insurers will pay you the full amount that you are owed & pursue the debt on your behalf to recover their funds.

Costs vary - but you are usually looking around 0.3% up to 1.5% of the sales value. What they ask for is that you provide them with monthly figures to what is being credited, so they can charge you accordingly in order to maintain the insurance policy.

The disadvantage to this, is that you will have to

Credit Factoring - again, another for the search engine to find out more information.

With credit factoring, the factoring company will pay you 70%-80% of the sales value upfront to cover part of the amount for the company you are doing business with. The benefit to this, is that you will not suffer so much with your own cash flow issues, because 70-80% of the funds are paid straight to you, so you will only need to wait the credit term to receive the rest. Another benefit is that the factoring company will chase the debt on your behalf if the company do not pay you. The downfall, is that if the company doesn't pay the remainder, you will have to wait for the factoring company to recover the funds for you, & there is likely a penalty to this too. Factoring can be quite costly, so be prepared to pay around 3-5% of the invoice value.

Personal Guarantees - Another way of protecting yourself is by way of a personal guarantee. These are not usually the go to method, but they can give confidence to you that you are likely to be paid if a company is willing to provide one. Be careful to check that the person who is signing the personal guarantee on behalf of a business actually has personal assets that the debt can be recovered against.

A personal guarantee is a contract by way of personal promise that if the debt is not paid by the entity, the person will repay some of or all of the debt amount back to you.