While one or two bad debts of small amounts may not make much of an impact, large debts or several unpaid accounts may lead to significant losses and increase a company’s risk of bankruptcy. Bad debts also make your company’s accounting processes more complicated and, in addition to monetary losses, take up valuable staff time and resources as they try to collect unpaid invoices. In these cases, the cost of bad debt protection is very much justified.

Bad debt protection can help limit your company’s losses when customers are unable to pay their bills. While you may not be able to avoid bad debt expense entirely, you can protect yourself from bad debt in several ways, such as allowance for bad debts.

Companies can manage bad debt in various ways. One way is for companies to set various limits when extending customer credit to minimise bad debt expense. Such limits can be set to manage existing and potential bad debt expense overall and for specific customers. For example, a company could dictate tighter credit terms based on each customer’s unique circumstances. In some cases, a company might avoid extending credit at all by requiring its client to procure a letter of credit to guarantee payment or require prepayment before shipment.

In other cases, companies may also want to change the requirements for extending credit to customers. For example, if customers in a certain industry or geographic area are struggling, companies can require these customers to meet stricter requirements before extending credit. The same strategy could be used to manage credit for customers who have outstanding debts over a certain amount or who are a certain number of days late on their bills.

If bad debt protection does not fit a company’s needs, there are alternatives. The best alternative to bad debt protection insurance is trade credit insurance  – also known as bad debt insurance or accounts receivable insurance – which provides coverage for a wide range of bad debt-related losses while supporting businesses to manage their accounts receivable more effectively.

The best trade credit insurance offers predictive protection through credit data and intelligence that helps companies improve credit-related decision-making and credit management. Since no company can avoid bad debt entirely, a trade credit insurance policy can cover any losses that occur even after the company and the insurer have taken steps to minimise losses.

If we compare bad debt protection to credit insurance, while bad debt protection only covers “losses from customer insolvency,” trade credit insurance also covers “protracted default,” which is when a solvent company is late with its payment or simply fails to pay at all.

A large, specialty trade credit insurance provider can also tailor a policy to cover other eventualities, including:

1. Unpaid invoices as a result of natural disaster.
2. Unpaid invoices as a result of political risk (inconvertibility, government intervention and war/civil disruption). For example, when doing business in other countries.
3. Losses that occur because of problems before goods are shipped. For example, this could involve custom-produced goods that you can’t sell to another customer.
4. Losses occurring after shipment by a contracted third party.
5. Losses occurring when selling on consignment terms.

The bad debt protection cost for your business and specific needs depends on your business’s needs and the type of protection you buy.

It usually varies depending on the provider, the nature of your business, your industry, level of finance, and timeframes. So the first thing you should do is ask for an insurance quote.

Trade credit insurance is vital for protecting your finances from non-payment from key clients. Without it, you could face significant losses, tying up valuable staff time and resources in attempts to recover unpaid invoices.

Investing in trade credit insurance and non-payment insurance protects your business from potential bad debts while giving you the confidence to pursue new opportunities and expand your customer base. With the right protection in place, you can focus on growth and stability rather than worrying about who will pay and when.

Contact us to get a trade credit insurance quote today and ensure your business is fully protected against unpaid debts.