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How to identify a bad client: 5 warning signs to look out for



Small Business

By Patrick Coghlan

Many small businesses and entrepreneurs start out too trusting and grow to become cynical after being burned by disappointing experiences one too many times.  Often, they take on new business relationships without enough awareness of that client’s reputationor credit worthiness. This could be due to time and money constraints, as well as eagernessand a lack of awareness as to what due diligence is available. Unfortunately, they may learn that a client is a bad debtor when it is too late. Even a trusted client can eventually become a bad debtor.


Fortunately, there are common warning signs to look out for.  Identifying these signs can prompt you to make a plan and take the measures needed to stay on top of the bad debtor and get paid on time (or avoid the client in the first place!).

Here are some warning signs of a bad debtor to consider:

Large first-time order – Large orders can be exciting for a small business, but they should not cloud judgement. Orders like this should treated with caution, if it’s too good to be true it often is!

Change in payment habits – Payments occur further and further outside of payment terms and become the norm.The debtor may try to make payments using multiple credit cards or pay small amountsat a time.

High turnover in staff – You find that you are frequently dealing with a new employee or manager in accounts receivable or hear of director changes. This could signal that the company is in financial trouble.

Breaking or Renegotiating terms – The debtor tries to renegotiate terms, payment cycles or price despite never having had a problem with them in the past.

Poor communication, excuses or unresponsive – You may find that you receive slower responses to communication and excuses like: “We are in the middle of changing financial institutions” or “We are waiting on payment from a large order.” Worst of all, the debtor may stop responding all together.

With these signs in mind, what can you do to perform better due diligence and stay on top of bad debtors?

  • Credit checks– You should be checking the credit history of all new clients, looking out for poor credit scoresand payment histories.
  • Cash on delivery– If you are unsure about a customer, try placing them on cash on delivery terms for six monthsor until you are more comfortable and familiar with them.
  • Use an innovative tool like CreditorWatch You can perform a credit check and monitoryour customers forimportant adverse changes like payment defaults, court actions, and mercantile enquiries. CreditorWatch also provides a suite of debt collection tools.
  • Have a process in placefor managing debtors. Be consistent as to when you issue invoices, statements, reminder notices and phone calls. The squeaky wheel gets the grease!

A bad debt can affect your businessand cashflow. Don’t wait until it’s too late to be vigilant and take action. Knowing what the warning signs are and what you can do to manage your debtors is a vital step for any successful business. We’d all like to trust everyone but it is important to look out for the best interests of your business first.


Patrick Coghlan is the Managing Director and one of the founders of CreditorWatch. CreditorWatch is an innovative and customer-centric commercial credit reporting bureau, empowering over 50,000 users to perform due diligence and determine risk to their business with credit management tools and credit risk information on any entity in Australia.