Knowing the early warning signs of bad debtors is important to the survival of any business that offers credit to its customers.
You should already have analytical measures (financial ratios, poor credit records, etc) in place to recognise bad debtors, but personality characteristics can also put your mind at ease – or give you early warning signs.
The following are questions worth asking about a customer, prior to granting or continuing to extend credit:
Does your customer seem to have a tendency to procrastinate?
Procrastination is a general feature of bad debtors and a worrying sign. These individuals often postpone meetings and take a long time to return calls.
Are there signs that your customer might be in denial regarding their over-indebted financial position?
Bad debtors often persuade themselves and others that the amount of money they owe is minimal, regardless of the size of their debt. Debt in itself is not bad, but hiding from its implications can be catastrophic. Be on the lookout for customers that don’t have a plan to manage their debt.
Does your customer avoid taking personal responsibility for their financial situation?
A poor credit history does not necessarily indicate a bad debtor, but responsibility needs to be taken for past mistakes. Bad debtors often provide convincing reasons why it’s not their fault they have not been financially successful in the past and have accumulated excessive amounts of debt.
Is your customer administratively weak?
If a business is unable to provide basic information like financial statements, identity documents and business records it’s an ominous sign and should not be ignored in your credit assessment.