When a customer defaults on its bills or is in danger of doing so, the company extending credit to that customer faces a bad debt expense. It reflects the amount of that a company is unable to collect now and may not be able to collect in the future. Because this bad debt expense must be charged against the company's accounts receivable and reduces the amount of accounts receivable on the company’s income statement.
There are many examples of companies dealing with bad debt expense. One company changed its approach after two major clients defaulted on their bills, leaving the company facing tens of thousands of dollars in losses. To make matters worse, the company had also dedicated considerable staff time and resources trying to collect on those bad debts with no success. By purchasing , the company not only protected itself against future losses from it, but it also was able to leverage that protection as it pursued growth with new customers.
Another company that was growing rapidly grew concerned about its exposure to potential bad debt expense as its customer base expanded. In the past, the company knew all of its customers either personally or by reputation. However, as it grew, the company recognized that it could not eliminate the risk of bad debt expense entirely. It had so many new customers coming on board that it had to evaluate their creditworthiness via third party data and information that did not always provide an accurate picture of a customer’s financial state.