The difference between bad debt and ‘doubtful’ debt

When a customer invoice remains unpaid, it’s easy to class it as a ‘bad debt’ immediately. There is, however, what is known as ‘doubtful debt’, which puts some transactions into a slightly different category.

The key difference between the two is that bad debts are those which cannot be collected by the business, and will usually have been clearly identified as such. Doubtful debts, in comparison, are unlikely to be collected. There is still the possibility of receiving payment for these outstanding balances, however small.

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Avoid making assumptions about company debts

Not all debts are labeled as bad debts from the off. There can be a number of reasons a company has not paid, causing a doubtful debt. These can be a slight delay in payment, dispute over pricing or delays in shipping.      

A debt is only bad if all efforts have been exhausted to seek payment and the balance still remains outstanding. This could come through the customer declaring bankruptcy, a lack of company information, or even if chasing the debt costs the company more than the amount outstanding.

Do you fear that a customer or supplier may hinder you with bad or doubtful debts? Run a credit check to avoid unwanted debts.

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Make allowances for debt in doubt

There are a number of reasons why a debt could be doubtful rather than simply bad. For example, a delay at the supplier’s end of the chain or a customer dispute may delay the process.

It’s advisable to allocate a portion of available resources to bridge the gap between a doubtful debt and the company’s related financial obligations. This balance is entered as a credit and a debit, keeping the figure balanced and ensuring it remains separate from any actual bad debts entered into accounting books. It can then be revised on either payment of the invoice or a lapse into bad debt.

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Don’t let doubtful debts go bad

A doubtful debt has the potential to become a bad debt in the future if left unchecked. Writing off a debt represents a financial loss to the business, so any opportunity to chase up with the customer should be capitalised on.

Tips for avoiding a doubtful debt turning bad:

  1. Monitor your customers and suppliers to get instant alerts, and avoid any surprises later down the line. 
  2. Take a look at the event history of a business. Has there been multiple director changes in a short period of time? Has there been multiple name changes over the years? These are potential warning signs which should make you think twice. 
  3. A high number of searches for the companies credit report. Creditsafe reports allow you to see how many times a company has been searched for over the last 12 months. A spike in report views can indicate changes are happening to the company that other customers and suppliers already know about. 

Looking to avoid bad debts?

Start monitoring your customers and suppliers and get instant alerts.