What is bad debt insurance, and how can it help my business?

10 August 2023

  • 23% of small businesses in the UK have struggled with bad debt in 2023.
  • Research shows bad debt levels have risen by 61%, putting businesses’ futures at risk.
  • Protecting your business from bad debts is possible with bad debt insurance.

Running up debts can be harmful to SMEs and their owners alike. Bad debts can lead to cash flow issues, lowered profits, and a negative impact on credit records – all of which can create a domino effect leading towards insolvency. Dealing with the results of bad debts can then increase the pressures and stresses on business owners. But while bad debts can’t always be avoided, they can be mitigated against with a combination of the right understanding and the right bad debt insurance policy.

What is a bad debt?

A bad debt is a receivable that a customer hasn’t paid. If a business takes payment in arrears – as accounts receivable – there is always a risk that an outstanding balance can become unrecoverable, with no promise of it ever being fully or even partially recovered. When this happens, it becomes a bad debt.

Bad debt can also refer to any debts that you find difficult to repay, such as a short-term, high-interest loan taken out to cover the shortfall caused by other bad debts. Other examples include:

  • Lines of customer credit that have become overextended
  • Debts you are unable to pay due to a lack of cash flow or liquid assets
  • Emergency overdrafts

Not all debts are bad debts. If your customers make regular, consistent repayments in good time, then the money they owe is classed as a good debt. Other examples include:

  • Low-interest loans with realistic, manageable repayments
  • Business loans and external financing
  • Buying new equipment in arrears

The impact of bad debt

The biggest impact of bad debt on any business is insolvency. If your business is owed money that’ll never arrive, or if you owe money you can never pay, it’ll become much harder to continue to do business. You may start to experience:

  • Difficulty covering expenses – bad debts lead to cash flow issues, which make it tough to meet day-to-day expenses
  • Damaged relationships – if you can’t pay suppliers or creditors because of poor cash flow, your business relationships will worsen
  • Reduced profitability – bad debts eat into your profits, with predictable effects on share prices
  • Negative impacts on credit records – unrecoverable debts have to be marked on your credit records
  • Higher working capital debts – if money isn’t coming in, you need to find capital to pay suppliers, which in turn leads to a reliance on high-interest loans

What is bad debt insurance?

Bad debt insurance, also known as trade credit insurance (TCI), is a comprehensive way to protect you from unpaid debts. This isn’t to be confused with bad debt protection insurance which will only cover you for those losses caused by customer insolvency. If your debtor is still in business, you aren’t covered. TCI, however, covers what’s called protracted default. That means if your debtor is still solvent, you’re covered if they’re late with their payments or if they fail to pay at all. This can include:

  • Late or missed payments because of natural disasters or political risks
  • Losses that occur because of problems before goods are shipped, or that occur after shipment
  • Losses that occur when selling on consignment terms

TCI cover also usually comes with added support. Your provider will analyse the credit worthiness and stability of your customers, help calculate credit limits, and provide in-depth customer intelligence that’ll help you make more informed business decisions.

Is bad debt insurance right for my business?

Bad debt insurance may be right for your business if you’re looking for:

  • Protection against customer insolvency
  • Flexible cover which adapts to your exact needs and requirements, based on your trade credit limits
  • Additional security to protect your bottom line, regardless of what happens to key customers

The most important thing to look for is a provider who’ll take the time to understand your business and the challenges you face, and tailor a bad debt insurance policy to your specific circumstances. A partner like Allianz Trade will be able to help you find the right policy, and make any changes to your terms, credit limits and credit control procedures, which will further protect you from the risk of bad debts.

Get your free quote for bad debt insurance from Allianz Trade

Bad debts can’t always be avoided, but they can be mitigated against with the right kind of trade credit or bad debt insurance.

Allianz Trade’s team of specialists is always ready to help you with advice and support to protect your business from the financial and emotional impacts of bad debts.

We tailor our bad debt insurance to your exact needs to make sure you’re always protected.

Contact us for a free, no-obligation bad debt insurance quote today.

For a free Business Fraud Insurance consultation call our UK team, 09:00-17:00 Mon-Fri.