Bad Debt Protection

What is Bad Debt Protection?

The last thing you want to think about, as a business owner, is the potential situation where a debtor is unable to pay for the goods or services you have provided. When you have an invoice that you are not able to collect – perhaps the business has gone into insolvency – you are left with this ‘bad debt’ that causes nothing but unnecessary stress and extra administration for you and your team. When you offer goods or a service on a credit basis, you are putting a level of trust in your customers that they will pay on the agreed terms. But what can you do if they simply do not pay what is owed?

Bad Debt Protection is a form of insurance that can be taken out as part of your invoice finance facility, or as a standalone policy. This policy covers your businesses invoices against customers failing to pay within their agreed terms. In the event where this happens, the insurance provider covers a substantial portion of the invoice value – usually up to 95%.

Having this insurance policy does not come for free, so it is important to weigh up the decision as to whether taking out this kind of cover is suitable for your business. This article will detail how to obtain a bad debt protection policy, explore the advantages and disadvantages of having such cover and answer the most asked questions regarding BDP.

How does Bad Debt Protection work?

When you choose to take out Bad Debt Protection, you firstly have the option to take out the policy as part of your invoice finance facility. This will be taken as a percentage of your invoice value. This percentage value will be outlined in your contract at the start of the facility so you will be fully in-the-know about what you will be paying. The amount you pay will depend on various factors such as the industry you work within, the nature of your business and the level of finance you are borrowing against. The percentage value will also depend on the provider which may be the lender you have your invoice finance facility with or an external provider. Contact Business Finance will be able to advise you as to the different costs and whether it would be beneficial to look at an external policy.

In order to be eligible for a Bad Debt Protection policy, there are criteria that must be met. You must have a solid trading history and creditworthy customers to assure the provider that there is an element of security. You must also be able to prove you have sound business practices, including a reliable paper trail and robust credit control methods.


The advantages of Bad Debt protection

The main benefit of having Bad Debt Protection in place is having that safety net should anything happen with one of your debtors where they are unable to pay you. Having that peace of mind that your business is protected can give you the confidence to keep growing and building without the fear that you will lose a large portion of expected funds. Having a Bad Debt Protection policy in place means that if one of your debtors defaults, you will receive payment from your provider.

Another advantage to Bad Debt Protection is the time and resources you will save in chasing bad debt. Instead of staff taking the time to recoup the money you are owed, the company you hold a BDP policy with can handle the situation with no administrative burden to you or your business. This is particularly complimentary when the Bad Debt Protection policy is part of an invoice finance facility, as it reduces the levels of administration even further.

It is also helpful for businesses that there can be an element of flexibility when taking out a BDP policy – you do not necessarily need to protect all debtor’s invoices. If you have debtors that you know are very reliable and unlikely to enter any type of insolvency, it may be better to only take out cover on selected customers.


The disadvantages of Bad Debt Protection

Although BDP can alleviate many of your worries surrounding your unpaid invoices, it is important to consider any drawbacks. The main disadvantage is having this insurance policy does not come for free – it is a small percentage of the invoice value but this will of course have an impact on your bottom line. If your clients are all stable debtors and are unlikely to ever have issues with payment, it may not be worth the added cost.

Another consideration to make is the administration that may need to be taken on if you choose to have a Bad Debt Protection policy with an external provider. It will be your responsibility to keep up to date with reporting for the policy to be valid. For example.  report if a debtor has not paid on the agreed terms within a week. An invoice finance leader can assist with this administration if you use their policy.


Frequently Asked Questions

Will it also cover international debtors?

Bad debt protection policy can also include export debtors. Limits are always subject to the creditworthiness of your clients.

Do I have to get cover on all of my customers?

No, you can either take a whole turnover policy or a selective offering. When you use an invoice finance lender’s policy, you often get a better rate if you take the whole turnover option.

Do bad debt protection policies cover the gross invoice value?

Invoice finance lenders often cover anything from 90-100% of the net invoice value. Internal policies do sometimes allow business to reclaim the VAT. Getting a bad debt protection policy against gross turnover is very difficult and can be costly. Getting a policy that just covers net turnover is often preferred as the VAT on bad debts can often be reclaimed later anyway. However, the invoice has to be over 6 months overdue, HMRC must have been paid the VAT and the invoices must have been reassigned back to the business from the invoice finance lender (if you have a facility).

What is protracted default cover?

This is extra cover often seen within a credit protection policy. This cover is simply when a debtor has failed to pay for goods or services, having accepted the delivery. Claims for protracted default are payable within 6 months from when the default by the debtor occurred. It is worth noting that if a debtor disputes an invoice, protracted default cover would often not be available.

Can it protect my business?

Bad debt protection is certainly a tool that every business owner who trades on credit terms with other businesses should consider. No matter how well you know your clients or how creditworthy you think your clients are, you should always give bad debt protection a consideration as it could protect your business in the long run.


What to do next…

Please get in touch with us at Contact Business Finance if you have any queries relating to your Bad Debt Protection policy. If there is anything else regarding business finance that we can assist you with, do not hesitate to reach out – we put businesses in contact with the most suitable lenders, depending on what you and your business needs. We are a free-of-cost service and will get to know you and your company to find the right solution that works for you.