BUSINESS | I remember the face of a small business owner who came to my office one afternoon. She owned a modest hardware store on the outskirts of Kampala, and her business was on the verge of collapse—not because of competition or poor products, but because of one simple thing: unpaid debts. Like many small-scale businesses in Uganda, she had offered credit to customers. Initially, it worked well—people loved the flexibility and kept coming back. But over time, payments stopped trickling in, and before long, she was struggling to keep her business afloat. Her story is not unique. In fact, it’s an all-too-common dilemma faced by many small business owners across the country.

It shouldn’t be all gloom and lost hope for such business owners. With the right strategies in place, these situations are not inevitable. There are steps every business can take to protect itself from the risks of extending credit.

The first thing you need to understand is that while offering credit might feel like a necessary evil to attract and retain customers, it can quickly turn into a financial nightmare if not properly managed. The strain of late payments or defaults can cripple your cash flow, preventing you from paying your own bills, investing in stock, or even growing your business. This isn’t just a theoretical risk; I’ve seen it happen. That’s why it’s crucial to take a proactive approach.

Developing a strong credit policy

One of the simplest yet most effective strategies is developing a strong credit policy. Imagine it like setting the rules for a game—without rules, everything falls apart. A clear, robust credit policy can save you from the headache of chasing unpaid invoices. It’s about setting boundaries. Before offering any credit, assess whether your customer is capable of paying it back. You might request financial statements or look at their previous payment records. And remember, not everyone should get the same level of credit. For some customers, a small limit is sufficient, while others may prove trustworthy enough to warrant larger amounts. Having clear limits prevents your business from tying up too much capital in unpaid credit.

Put Everything in Writing: Contracts Are Key

But it doesn’t end with having a policy—everything should be in writing. Verbal agreements are common in Uganda, especially in informal settings, but when things go wrong, they offer little protection. Contracts are key here. A written contract outlining the payment terms, penalties for late payments, and other crucial details is not just a formality—it’s your lifeline. Legally, contracts carry weight, and in Uganda, they’re enforceable under the Contracts Act of 2010. When that hardware store owner came to me, one of the first things I asked her was whether she had any written agreements with her customers. Unfortunately, she didn’t. And that made her situation much harder to resolve.

Stay on Top of Record-Keeping

Now, even with a solid policy and contracts in place, you still need to keep meticulous records. I can’t tell you how many businesses I’ve seen struggle simply because they didn’t keep proper documentation. Imagine trying to track down unpaid debts months after the fact, only to realize you don’t have the right details about the transaction. That’s why it’s essential to stay on top of record-keeping. Luckily, today’s technology makes it easier than ever to maintain accurate records. There’s no need for piles of paper—accounting software can track who owes you what and when payments are due.

Follow Up with Customers: Don’t Wait for the Debt to Accumulate

Following up on debts is another crucial piece of the puzzle. Often, customers don’t default out of malice—they simply forget. A friendly reminder via phone call, email, or even a text message can make all the difference. The earlier you remind them, the less likely you’ll find yourself with a pile of unpaid debts months down the road.

Use Legal Debt Recovery Measures

Of course, even the best systems can’t prevent every default. Sometimes, despite your best efforts, customers just don’t pay. When that happens, you have legal options. In Uganda, small businesses can file claims to recover unpaid debts, though this should be a last resort. Before heading to court, it’s often worth trying alternative dispute resolution methods, like mediation or arbitration. These methods can be faster, less costly, and less adversarial. And if those don’t work, there are always debt collection services that can take over the headache of recovering what’s owed to you.

Train and Empower Your Team

Training your team can also play a significant role in preventing credit issues. Business owners often underestimate the value of financial literacy. But equipping yourself and your staff with knowledge about credit management can empower you to make better decisions. In fact, a well-trained team can spot potential credit risks early on and help manage them before they become problems.

Partner with Financial Institutions

Finally, consider partnering with financial institutions. They can offer credit insurance to protect you if a customer fails to pay, or factoring services, where you sell your receivables to a third party at a discount for immediate cash. These services may seem like an extra cost, but they can save you a world of trouble if you rely heavily on credit sales.

As I reflect on the struggles of the hardware store owner, I can’t help but feel for her and the countless others who find themselves in similar situations. But I also know that by taking proactive steps—whether it’s drafting better contracts, keeping better records, or simply being more vigilant about who you offer credit to—small businesses in Uganda can protect themselves from the pain of unpaid debts.