10 Tips for Small Construction Businesses to Protect Themselves from Bad Debt
The construction industry is notorious for its long payment cycles and unpredictable cash flow, and it seems the situation has only become more challenging in recent years.
With more businesses facing financial difficulties, small construction firms must be more vigilant than ever to avoid the trap of bad debt. After all, it’s hard to celebrate winning a big contract if you never get paid for it, right? Unpaid invoices can quickly lead to serious cash flow problems, potentially putting your entire business at risk.
But fear not—there are steps you can take to protect your construction business from bad debt.
“It’s not the size of the project that matters, but the reliability of payment.” — Unknown
Here are 10 practical tips to help keep your hard-earned money where it belongs: in your account.
1. Perform Credit Checks on Clients 📋
Let’s be honest—some clients are about as reliable as a British summer. Before you jump into any new project, it’s essential to run a credit check on your potential client. You wouldn’t lend your tools to someone you don’t trust, so why lend them your time and expertise?
Credit checks help you assess the financial stability of a client. Providers like Creditsafe offer up-to-date data on clients’ financial standing so you can make informed decisions about extending credit or requiring upfront payments. Regularly checking the credit of major clients will help you spot trouble before it arrives.
2. Use Contracts with Clear Payment Terms 📑
Contracts aren’t just legal jargon—they’re your shield in battle. A well-written contract is essential to protect your business. It should clearly outline the scope of work, payment schedules, and penalties for late payments.
Don’t let a client—no matter how big—push you into changing your payment terms. A big contract only benefits you if you get paid, so stick to your guns when it comes to payment schedules. If you’ve got a solid contract in place, you’ll have the leverage you need when payments start to slip.
3. Request Deposits or Stage Payments 💷
Think of deposits as your safety net. Requesting a deposit upfront, especially for large projects, gives you some breathing room if payments go awry. Likewise, implementing stage payments, where the client pays at key milestones, helps maintain cash flow and minimises the risk of unpaid final bills.
It’s simple—no deposit, no deal.
4. If It’s Too Good to Be True… It Probably Is 🫣
We’ve all heard the saying, but in the construction world, it holds extra weight. When a massive, unexpected contract lands in your lap, be cautious. While it may seem like a golden opportunity, it could also signal a company in financial trouble, looking to lure in contractors before they go under.
A little due diligence can go a long way. Investigate thoroughly before celebrating that surprise windfall.
5. Implement Strong Debt Collection Processes 🤝
Even with the best clients, late payments can still happen. Have a system in place to follow up on overdue invoices. Start with polite reminders—sometimes invoices genuinely slip through the cracks. If that doesn’t work, move on to formal demands. And remember: “Thee who shouts loudest wins.” If a client owes you £5,000 but offers £2,000 now, take it. Something is always better than nothing.
6. Look for Red Flags 🚩
Businesses rarely collapse out of the blue. There are usually warning signs, and the key is to catch them early. If payment terms are being stretched, or if clients start making excuses for delays, it might be time to start worrying.
Red flags also include changes in specifications, sudden cost-cutting measures, or hearing about layoffs within the client’s company. Keep an ear to the ground, and don’t ignore those gut feelings when something seems off.
7. Be Selective with Clients 🙎
It’s tempting to go after every opportunity, but not all clients are worth the hassle. If a potential client has a history of late payments or the project seems financially risky, consider walking away. It’s better to have smaller, reliable projects than to chase a high-value contract that could sink your business.
Trust your instincts and prioritise clients who’ve proven themselves trustworthy.
8. Purchase Trade Credit Insurance 🧾
Insurance may not be the most exciting topic, but it’s certainly a smart move. Trade credit insurance can protect your business by covering unpaid invoices if a client becomes insolvent or defaults. Yes, it comes with a cost, but the peace of mind it offers—particularly for large contracts—can be invaluable.
9. Use Your Ears 👂
The construction industry is rife with gossip, and while not all of it is useful, some can provide valuable insights. Keep your ears open for whispers about clients who may be struggling financially. Suppliers, other trades, and even courier drivers are often great sources of information.
It’s a small industry, and a little collaboration can go a long way in protecting everyone from rogue clients.
10. Use Retention Clauses with Caution ⚠️
Retention clauses—where part of the payment is withheld until the project is completed—are common in construction. However, they can be a double-edged sword. If a client is delaying payment, those withheld funds can leave you in a vulnerable position.
Where possible, negotiate to have retention amounts placed in a trust account, ensuring that the funds are protected and available when due.
“The art of leadership is saying no, not yes. It is very easy to say yes.” — Tony Blair
Conclusion
The construction industry will always have its ups and downs, but that doesn’t mean your business has to suffer because of it. By being proactive and implementing the right strategies, you can protect your business from the threat of bad debt. Credit checks, strong contracts, and regular monitoring of red flags are your best defence. And while it’s important to be cautious, remember—don’t let fear of bad debt hold you back from growing your business.
With these tips, you can navigate the financial challenges of the construction industry with confidence, build stronger relationships with clients, and create a business that’s not only resilient but also thrives in uncertain times.
Protecting your construction business from bad debt doesn’t have to be a constant battle. With the right strategies, you can build a business that’s financially resilient and ready to thrive. At The Power Within Training, we offer tailored programmes for small construction businesses to help you manage cash flow, avoid bad debt, and create sustainable growth. Got questions? Our team is here to help—reach out today!
Contact us today to learn how we can help strengthen your financial resilience!