Bad Debt Protection helps protect its finances from non-paying customers. Should one of your customers fail to pay, bad debt protection means any loss is absorbed by the finance provider rather than your own company.
Payment delays present a real risk to UK business, this places pressure on cashflow and restricting your capacity to grow. Even when a business is thriving, it can take just a few unpaid invoices to create significant issues.
Designed to meet the needs of most companies large and small, it provides all the checks and security needed to trade with a client, with the confidence knowing if something goes wrong the business will still get paid.
Bad Debt Protection Explained
In 2016 UK SMEs wrote off almost £6bn of bad debts, according to Direct Line for Business. One in five small businesses told the insurer that they had written off debts and further analysis revealed that this was on average £31,330. One in ten said that they had given up ever receiving outstanding balances of £100,000 or more. These Late payment is one of the largest threats to SME survival, with 60% of small business failing within their first five years of trading.
Non-paying Customers can occur for a number of reasons, such as insolvency, payment default or dispute, and can frequently cause profitable firms to go bust because they simply don’t have enough working capital or bad debt protection in place to bounce back after the loss of tens of thousands of pounds.
How Bad Debt Protection Can Safeguard Your Business?
Bad Debt protection insurance safeguards your business against the failure of a customer to pay their debts. It may be as a result of your customer becoming insolvent, or because they fail to pay within the agreed credit period resulting in a bad debt.
This can have a serious impact on your cashflow and, if it does result in a loss, then it could be very damaging to your business and supplier relationships. Bad Debt Protection covers goods or services sold and delivered. This is tailored to cover many other risks, such as work in progress and contracts.
Can Bad Debt Insurance Cover My Business Nationally And Internationally
Bad Debt Insurance covers companies that export to protect themselves against a range of ‘political’ risks (as well as the buyer risks) which may prevent or delay payment.
Examples include: war or civil war in your customer’s country, cancellation of the contract by the government of your customer’s country, or governmental regulations such as embargo or quotas that prevent the export or import of goods. So the business is covered Internationally and nationally.
What are the other benefits to Bad Debt Credit Insurance?
- Improved cash flow – assisting you in the collection of your overdue accounts, the credit insurance company will chase bad debts on your behalf thereby providing a speedy and successful way for you to collect money owed to your business.
- Helping you to secure trade finance – banks and trade finance companies are often more willing to provide trade finance, or more favourable lending terms to businesses with credit insurance.
- Improved trading terms with your suppliers – helps you to negotiate more favourable terms with your suppliers if they know you have taken the steps to protect your assets and balance sheet.
- Less risk, greater peace of mind – credit insurance gives you the reassurance that if one of your insured buyers can’t or won’t pay, then the credit insurer will.
Advantages of Bad Debt Protection
The main advantages to bad debt protection is that businesses hold on to their hard earned revenue even in the event of non-payment. It can be put in place very quickly usually within 24 hours and debts can also be backdated. Debt protection is useful where there is an element of doubt about the customer’s ability to pay now or in the longer term. It can also be a good safety net if the business has suffered past experiences of bad debt or when a few customers represent a large percentage of total sales.
As part of the process, the factor or invoice discounting provider works with the business to assess any potential risk from new and/or existing customers, carrying out credit checks and providing advice, which minimises the business’ exposure to bad debts. Business owner can also choose, which customers should be covered. This process of monitoring customers to avoid bad debt frequently gives businesses the confidence they need to expand by taking on new customers and orders in the knowledge that their payments are secure.
Even though this is a great way to manage risk it has its disadvantages. Sadly not all factors or invoice discounting companies take on non-recourse services. Non-recourse factoring or invoice discounting is also more expensive (often by as much as a percentage point) and it can be limited to invoices of customers that are most likely to pay.
If your customer has a poor credit history, the invoice funder may decide against taking on the risk of non-payment. Finally, non-recourse factoring or invoice discounting doesn’t always protect the business from any risk of customer nonpayment. Many providers offer non-recourse accounts that only apply if the customer becomes bankrupt.
What Happens when a Customer Doesn’t pay?
If one of your customers becomes insolvent, for instance, the provider manages the procedure on behalf of the business, saving time and money by liaising with the insolvency practitioner. this is to establish if a dividend is to be paid by this insolvency firm, should it not then the credit insurance will pay the outstanding monies.
Once it has all the necessary documentation, the process can be resolved in as little as weeks, which prevents money from seeping out of the business and enables business owners to focus on what they do best, which is the day-to-day running of the business.
How Much Does Bad Debt Protection Cost?
As with every Invoice Finance product, the cost depends on the Invoice Finance Provider, the level of finance cover required, and the timeframes. It also does not usually apply for a period after the invoice factoring commences, so that the lender can build up a level of trust. Below is an example of bad debt protection insurance costs.
Debt Protection Cost Example : 90% of the invoice is covered.
Net invoice is £50,000 + VAT.
£45,000 is covered by the bad debt protection,
£10,000 of the VAT could be reclaimed from HMRC.
Minus an administration fee of around £1200, around £53,800 is recovered
Features of Invoice Protection Insurance
- You offset the risk of bad debt
- Offers Protection for up to 100% of bad debts
- Can be applied to all or select customers
- Credit check all of your existing customers and any prospective customers
- All administration is handled by the provider
- Save you time and money should your customer enter insolvency
Ways to Protect Your Business Against Customer Insolvency or Non Payment
- Implement a credit checking policy for new clients
- Once you’ve researched your clients, set appropriate credit limits based on their levels of risk
- If you’re using invoice finance to boost your working capital, ensure you opt for a bad-debt bolt on facility in case of customer no payment
- If you’re working in a volatile industry or concerned about a particular client, consider credit insurance
Get a Bad Debt Insurance Quotation
Interested to receive a quotation for bad debt protection insurance? Invoice Funding have been voted one of the best Factoring brokers in the UK. As we work closely with Invoice Factoring providers we have negotiated preferential rates on bad debt protection bolt on products.
We pass this on to our clients and have negotiated on a number of times for our clients to receive this product free of charge. If you feel bad debt insurance is something you would like to know more about simply complete the online enquiry form.