What you'll do
- Check a customer's standing before extending credit
- Set credit limits and terms that match the risk
- Use written terms of trade to protect your position
- Spot early warning signs of payment trouble
- Build a simple process to keep bad debt low
8 min
Prevention beats recovery
Bad debt is far cheaper to prevent than to chase. The foundations are knowing who you are dealing with, setting sensible credit limits, and having written terms of trade that the customer accepts before you supply. Together these reduce both the chance of bad debt and the cost of recovering it if it happens.
Build your protection step by step
- Confirm the customer's correct legal entity before extending credit.
- Run a basic check on new accounts, especially for larger orders.
- Set a credit limit that matches the risk and your cash flow.
- Have customers accept written terms of trade before you supply.
- Watch for warning signs such as slipping payments or broken promises.
- Review limits and terms regularly as the relationship develops.
A light but consistent process keeps most bad debt from ever arising.
When prevention is not enough
No system stops every bad debt, so it pays to be ready. Strong terms and records mean an account that does go bad is easy to act on. You can sense-check an at-risk account with a free debt appraisal, or refer it at no upfront cost via merion.com.au/refer-a-debt. This is general business information, not legal advice.
Good to know
- Knowing the customer and setting credit limits prevents most bad debt
- Written terms of trade protect you and strengthen any recovery
- Watch for early warning signs and act before an account goes bad
FAQ
What is the best way to avoid bad debt?
Know the customer, set sensible credit limits, and use written terms of trade accepted before you supply. Prevention is far cheaper than recovery.
Should I check new customers before giving credit?
Yes, especially for larger orders. A basic check on the correct legal entity helps you set a limit that matches the risk.
What are the early warning signs of trouble?
Slipping payment dates, broken promises to pay, and rising balances are common signs. Act on them before the account goes bad.
Still not sure? Our team is happy to talk it through.