According to Reuters, Abil's troubles come from a business model based solely on unsecured lending – high-margin loans not backed by collateral – which it offered widely to its core market of low-income borrowers. But those clients have been hit by rising unemployment, food and fuel costs, as well as slow growth in Africa's most developed economy – and Abil has been slammed by their bad debts.
While the lender's business model and economic factors may have played a role in its troubles, Abil could have minimised losses by applying good debtor management practices.
To avoid falling into the same trap, use these two tips to manage debtors effectively.
#1: Do credit-checks on all potential customers
Don't underestimate risks in your enthusiasm to take on new business, says dynamicbusiness.com.
Do proper credit checks. This is quick and isn't that expensive.
'It's important to establish the correct business title, together with its legal status (i.e., limited company, sole trader etc) before seeking reports from agencies or trade references. Awareness of your customer's financial health can safeguard against unreliable debtors,' says the site.
#2: Collect your debts immediately
Get your debtors to pay your business on time. Send timely invoices so you don't delay their payments.
It's also a good idea to spend a little extra money on debt collection.
Experts behind the Practical Accountancy Loose Leaf Service say if you spend extra money on debt collection, you'll reduce:
Just make sure your administrative and other debt collection costs don't become more than the money you recover.
Let Abil's collapse be a lesson to you when it comes to debtor management. Use these two tips to manage your debtors effectively. For more tips on debtor management, check out the Practical Accountancy Loose Leaf Service.