Question

What are the basic strategy of every organization or corporation when it comes to resolving their bad debts? Please explain base on your understanding :)

Answer 1

Some of the basic strategy followed by corporation and Banks to reduce their bad debt scenarios are given below

• Verify the debtors and do credit checking: Since it is very difficult for a firm to do business without giving short term or long term debts to its partners, we can only improve the reliability of the partners by doing credit checkup. Also before coming to a contract with the client, the cash flow potential of the clients should be verified. This can be done through by contacting different credit rating or their previous history of default
• Create proper billing system: Creating proper bill and invoice for the service you provided or for the money you lend is necessary for taking proper legal actions against companies who defaulted voluntarily. This can be done by setting up proper ERP systems
• Ask for collateral: If you are Bank or Financial institutions you can ask for physical assets as collateral which guarantees the debt repayment by the companies or individuals. Getting intangible assets are not recommended as its value might reduce significantly if the borrower faces some business risks
• Create a Early warning alert system for such systems: The credit team in your company can be advised to actively monitor the exisiting functions of the debtors and in case there is a chance for them to default, our company should be able to quickly withdraw the financial support we provided. When early warning system is not there and one of our borrower go bankrupt, we have to wait a long time to get our debt cleared and compared to that early warning detection is recommended.
• Choose insurance options: Most reliable options is to take a Business insurance that can support in case of bad debts in an exchange by paying a premium to insurance.