As a credit grantor, your business is one of many that allow consumers to use goods and services immediately and pay for them later. While extending credit increases your gross sales, it also puts you at risk of some losses due to nonpayment.
Most businesses that "write-off" a percentage of sales to bad debts have an established rate of procedure for this action. In most businesses, this rate runs from 0.5% to 1% on low-profit transactions, and up to 5% on high-profit sales and services. When the charge-off rate exceeds 5%, it becomes necessary to find ways to improve controls over bad debt losses.
You don't have to accept excessive losses as an inherent part of doing business and extending credit. The fundamentals of establishing and maintaining effective controls over bad debt are comparatively simple, and it is possible to reduce these loses.
You can keep bad debts to a minimum and have more success recovering them if you identify them early. Your actions at this point of your credit-collection procedures are vital. Your reaction can mean the difference between recovery or loss. When you identify a potential bad debt, you need to act promptly and decisively. Usually the more time that passes, the less consumers pay.
Accounts that are carried indefinitely usually originate with creditors who do a limited amount of business, have the highest credit losses or the lowest debt recovery. Most national associations keep track of averages of delinquency for their industry.
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