Bad Debt Protection


Bad debt protection (also known as credit protection) is insurance a business can take to protect them if debtors go into a form of insolvency. It covers a percentage of the outstanding invoices and protects them if a bad debt were to arise.

How does bad debt protection work?

You can either have an internal policy, whereby you manage the policy in house. Or you can use an Invoice Financiers policy and add in onto your invoice finance facility and receive assistance with managing the information required. The sole purpose, know matter which route you take is to protect your business from any customer insolvency. However, you must get limits on debtors and report when they are late paying to avoid any complications.


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Can bad debt protection be added to my invoice finance facility?
Bad debt protection can also be added to an invoice finance facility. Invoice finance lenders like it when clients take added security as it helps to ensure that you will still be receiving payment if your customer can’t settle their invoices to your business. The lender can also run credit checks to your new and existing customers and offer you up to 100% protection on your customers. So, you can have peace of mind that customer insolvency won’t negatively impact the availability of funding or have a major impact on your business. 

What are the benefits to my business with bad debt protection?

Peace of mind – if you are worried about trading with a client and them becoming insolvent. You can feel safe in knowing that the invoices are protected.

Increase trading with a client – you might have the opportunity to do more work with a client. However, this might mean that they are too crucial to your business. Having bad debt protection can give a lender comfort and enable them to fund invoices to a larger scale.

Flexibility – invoice finance lenders can often be more flexible with your facility with concentration limits etc if they know that you have a suitable bad debt protection limit in place with the debtors you are trading with.

Cost of a bad debt vs Premium – the cost of a bad debt could far outweigh the annual premium of a bad debt protection policy. 

What are the disadvantage of bad debt protection?

Bad Debt Protection Limits – you can only get bad debt protection limits on debtors who are creditworthy. Therefore, some of your debtors might not be covered.

Wide-Spread ledger – you might have a ledger that is very wide-spread. If you haven’t got all your eggs in one basket, you need to weigh up your options and see if the premium is worth it even I you have a wide-spread sales ledger.

Policy Management – if you have an internal Bad Debt Protection policy, you must keep up to date with reporting for the policy to be valid. For example, reporting if a debtor has not pad on terms within a week. An invoice finance lender can assist if you use their policy.

How much does bad debt protection cost?

This depends on many variables if you require an internal policy. Generally, providers will want to see your last two years bad debt history, limits required etc. If you use an invoice finance lenders policy, the costs can be anything from 0.1-0.9% per invoice.

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 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 on 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).

Can it protect my business?

Bad debt protection is certainly a tool that everything 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.

Do I have to get cover on all my customers?

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

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.