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Loans Can Be Good Loans Can Be Bad

Nov 10, 2007
There are many business enterprises that will not survive for more than a few days if there are no customers. If payments get denied or delayed businesses get impacted, sometimes fatally.

This is bound to lead to problems for the business. In fact, the inability to receive payments may cause the business organization itself to have troubles meeting its own expenses. This may lead to bad debt which can snowball into a major liability for the company. And do not think that anyone is immune to this.

The credit payment system came into existence because at times it would be difficult to make large payments. The system of paying by credit allowed the dealer to continue doing business with customers who he had a long standing relationship with and who were finding it difficult to make payments.

The system of credit is great. But it presupposes that payments will eventually be made. However, as we all know, this does not always happen. People do suffer from financial crises at times. This makes it difficult for them to pay their bills and debts. Sometimes the payment may never materialize, and the person who is to receive the payment finds himself stuck with bad debt. Yet, even though the payment will never appear, the customer will have received the benefits of the purchase he had made.

Companies do plan ahead of time and make provisions for any such bad debts but these do bring down their net profit. Moreover, it does not reflect well in their accounts. Many individuals also are generous enough to loan money to their friends or others. This unpaid money is called bad debt and must be written off the books of account after a waiting period.

If you are a publicly listed company, presence of substantial bad debt is embarrassing to board members. It sometimes leads to all their hard work going unnoticed. It is sad but true that sometimes only these lost payments manage to catch everyone's attention. Only some types of bad debts can be deducted from tax whereas others are not exempted from it.

The only way in which a company can cut down on such expenses is by employing the services of a collection agent who can go from debtor to debtor to collect the pending payments. But the criminally minded fraudster would probably have given a fake address in any case.

In order to protect one from heavy losses, the seller or dealer should always get an undersigning from the customer stating that he will make the payment within a stipulated period of time. Alternatively, the dealer could collect a retainer fee for the services are being offered to the purchaser. Offering a payment schedule might be an option to prevent debt from turning bad. A payment plan is a revised schedule of payment.
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