Bad Debt Protection

Is a it a good idea?

Whether bad debt protection is a good idea largely depends on your business circumstances. If your business trades on credit terms and faces a high risk of customer non-payment, bad debt protection could be a wise investment. It can provide stability, protect your cash flow, and give you the confidence to expand your customer base.

However, if your customers are typically reliable with payments and the cost of protection outweighs the potential risk of bad debts, it might not be necessary. As with any business decision, it’s about weighing up the pros and cons and making an informed choice.

What are the key considerations when taking Bad Debt Cover for by Business?

When it comes to bad invoice finance debt protection, it’s not a one-size-fits-all solution. There are several key considerations to bear in mind to ensure it’s the right fit for your business. Let’s delve into these factors:

• Business Size: Larger businesses with a high volume of invoices might benefit more from protecting against bad debt, as they’re more exposed to the risk of non-payment.
• Industry: Some industries face a higher risk of customer insolvency than others. If you’re in a high-risk industry, bad debt insurnce protection could be a smart move.
• Financial Stability: If your business relies heavily on steady cash flow to operate, bad debt protection can provide a safety net against disruptions caused by unpaid invoices.
• Customer Creditworthiness: If you’re dealing with customers who have a shaky credit history, bad debt cover can help mitigate the risk.

Bad debt protection – What are the alternatives?

While bad invoice finance debt protection is a valuable tool, it’s not the only strategy for managing business debt and protecting your cash flow. Here are a few alternatives:

• Invoice Factoring: Invoice factoring involves selling your invoices to a third party for immediate cash, reducing the risk of non-payment.
• Credit Insurance: Similar to bad debt insurance protection, credit insurance covers your business against the risk of non-payment, but it’s typically used for trade credit rather than invoices.
• Strict Credit Control Procedures: Implementing robust credit control procedures can help prevent bad debts in the first place.
• Reserves for Bad Debts: Some businesses choose to set aside a portion of their profits to cover potential bad debts.

Bad Debt Insurance Eligibility

So, what does it take to be eligible for protection against bad debt? While criteria can vary between providers, here are some common requirements:

• Trading History: Most providers will want to see a solid trading history, demonstrating that your business is established and reliable.
• Creditworthy Customers: Providers will typically assess the creditworthiness of your customers, as they’re ultimately the ones responsible for paying the invoices.
• Sound Business Practices: Providers will look for evidence of sound business practices, such as robust credit control procedures.

Features and Benefits

Bad debt protection comes with a host of features and benefits that can give your business a financial safety net. Here’s what you can typically expect:

• Coverage for Unpaid Invoices: The primary feature is that it covers unpaid invoices, ensuring your cash flow isn’t disrupted by non-payment.
• Risk Mitigation: By covering unpaid invoices, bad debt cover helps mitigate the risk of customer insolvency or protracted default.
• Support for Business Growth: With the reassurance of bad debt insurance, you can confidently expand your customer base and grow your business.
• Peace of Mind: Perhaps one of the most significant benefits is the peace of mind that comes with knowing your business is protected against bad debts.

Bad Debt Protection Rates and Charges

Just like any other form of protection insurance, debt protection comes with its own set of costs. These can vary depending on the provider, the level of cover you choose, and the risk profile of your customers. Typically, you can expect to pay a percentage of your turnover or the invoice value. It’s crucial to factor these costs into your financial planning to ensure protection is a viable option for your business.

Keep reading – Invoice discounting

Example

To truly understand the value, it helps to see it in action. Let’s take a look at a couple of real-world examples:

1. Company A: A small manufacturing business was facing cash flow issues due to unpaid invoices. After implementing cover against their debt book, they were able to recover 90% of the unpaid invoice value, stabilising their cash flow and enabling them to continue trading confidently.
2. Company B: A large wholesaler was hit hard when a major customer went into administration, leaving a significant amount of invoices unpaid. Thanks to their protection policy, they were able to claim back a substantial portion of the unpaid invoices, mitigating the financial impact on their business.

Keep reading – Dealing with late payments or Asset based lending.