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How can I tell if a customer risks becoming a bad debt?

Initially you should assess the customer’s creditworthiness — for example, by getting an online credit rating. You may want to consider rechecking credit ratings from time to time, or if the customer asks for an increased credit limit, in case their creditworthiness has deteriorated.

Warning signs that may raise concerns include:

  • A trend of increased payment delays.
  • Making partial payments rather than settling the full account.
  • Asking for a longer credit period.
  • Increased purchases — if this is a sign that other suppliers have cut them off.
  • Delaying tactics, such as sending cheques that have been accidentally left unsigned or telling you that the bookkeeper is on holiday.

Industry news may also alert you to a potential problem, for example if your customer loses a major contract of their own.

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